Unit 3 February 21

• What is investment
• money spent or expenditures on
• new parts ( factories )
• Capital equipment ( Machinery )
• Technology ( hardware and software )
• New homes 
• Inventories
• Expected rate of return
• How does business make investment decisions
• cost/ benefit analysis
• How does business determine the benefit 
• expected rate of return 
• How does business count the cost 
• Interest costs
• How does business determine the amount of investment they undertake 
• How do you compute the real interest rate (r%) - r% = i% - 𝚷% ( real GDP = Nominal GDP -Inflation)
• What then, determines the cost of an investment 
• What is the slope of the investment demand curve
• Downward Sloping 
• Why
• when interest rates are high, fewer investment are profitable; when interest rates are low, more investment
• Shift in investment demand
• Cost of production
• Business taxes 
• Technological 
• Stock of capital 
• Expectations
• Aggregate Supply- The level of real GDP (GDPr) that firms will produce at each price level
  
• Long- Run Vs. Short- Run
• Long Run- Period of time where input prices are completly flexible and adjust to changes in price level
• The long run, the level of real GDP supplied is independent of the price level 
• Short Run- period of time where input prices are sticky and do not adjust to changes in the price level
• In the short run, the level of real GDP supplied is directly related to the price level 
• Long- Run Aggregate Supply (LRAS)
• The long- run aggregate supply or LRAS marks the level of full employment in the economy 
  
• Short-Run Aggregate supply (SRAS)
• Because input prices are sticky in the short-Run, the SRAS is upward sloping 
  
• Changes in SRAS
• An increase in SRAS is seen as a shift to the right 
• A decrease in SRAS is seen as a shift to the left 
• The key to understanding shift in SRAS is per unit cost of production
• Per unit production cost = Total input / Total output cost 
• Determinants of SRAS
• input prices 
• productivity 
• Institutional Environment
• input rices - domestic resource rate 
• wages ( 75% of all business costs )
• Cost of capital 
• Raw materials ( Commodity prices )
• foreign resource prices
• strong money = lower foreign prices
• Weak money = Higher foreign resource prices 
• Market power 
• monopolies and cartels that control resources control the prices of the resources
• increase in resource prices = SRAS shift right 
• Decrease in resource prices = SRAS shift left 
• More productivity = lower units production  cost = SRAS shift left
• Lower productivity = higher unit production cost = SRAS shift right 
• legal- institutional environment
• taxes and subsides
• taxes ( money to government ) on business increase per unit production cost = SRAS shift left
• Subsides ( money from government ) to business reduced per unit production cost = SRAS shift right 
• Government Regulation
• Government regulation creates a set of compliance = SRAS shift left
• Deregulation reduces compliance cost = SRAS shift right 
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