induced investment

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Investment in response to changes in output. This applies at a macro- rather than a microeconomic level. Investment by a firm cannot be a technical response to its own past output, which has already been produced with the capital in place. Investment may, however, be affected by output changes through their effects on profits. When output rises, because overhead costs can be spread more widely profits rise, and this both provides funds for investment directly and makes it easier to borrow. Investment is not determined by future changes in a firm's output: output and investment plans are formed simultaneously. Investment by each firm responds to expectations about market prospects, which are influenced by changes in the incomes of its customers. Induced investment is contrasted with autonomous investment, which is determined by long-run factors independent of short-run changes in income, such as technical innovations.

Subjects: Economics.

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