Investment Demand

Investment demand refers to that part of economy’s total expenditure which creates new capital goods like plants, machines, equipments etc. that increase the productive capacity of economy. Private investment refers to the investment made by the private entrepreneurs for creation of new plants, factory buildings, machines etc. which increases the productive capacity of the economy. It is different from financial investment which refers to the purchase of shares and debentures of existing companies. Financial investment does not help in raising income and employment in the economy. It is only real investment which raises the income and employment by creating new productive capacity. Private investment is based on the consideration of profit. If profit prospects are low then private investment will fall leading to the fall in aggregate demand and consequent decline in aggregate output and employment. On the other hand, if profit prospects are bright, private investment will increase.

In his theory of income determination, Keynes assumed investment to be autonomous. That means whatever may be level of income, investment remains autonomous. That means whatever may be level of income, investment remains constant throughout. According to Keynes, investment depends on growth of market, growth of population, changes in technology, organisational and institutional changes all long-run considerations and in the short-run all sorts of expectations. Merely because income rises, investment may not rise on that account alone. Therefore investment is autonomous, i.e. independent of income. In Keynes theory of income determination, the C+1 curve parallel to ‘C’ curve to show that investment is same at all levels of income. In the following diagram, the vertical distance between ‘C’ ‘C + 1’ curves represents investment demand which remains constant throughout.

The equilibrium level of income and employment in the economy is determined at the point, where aggregate demand is equal to aggregate supply. This is also called the point of effective demand. According to Keynes, aggregate demand consists of consumption demand and investment demand.

Again, aggregate supply also has also two components, i.e. a part is consumed and a part is saved.

Y = C + 1………(1)

Y = C + S………(2)
In the equilibrium level of income, aggregate demand is equal to aggregate supply.

From the equation (1) and (2) we get

C + S = C + 1

Or S = 1

This means saving and investment are equal at the equilibrium level of income. The following table shows aggregate supply and aggregate demand at different levels of national income.