Neoclassical Models: Unbounded Rationality

Abstract

Neoclassical models of investment define investment in two ways. Investment is demand for durable capital goods on the one hand, and on the other it is the supply of savings. The basic neoclassical view of the demand for a capital good is that, like the demand for everything else, it is a function of its relative price. Investment is the acquisition, at a given point of time, of capital goods which contribute services to production at different points of time. The passage of time means that the interest rate is part of the price, commonly called the ‘user cost’ of capital services.