An Analysis of A Market for Investment Goods

If prices become more favourable, users of capital goods may want to increase their stock of this factor of production. In a theory of investment the problem is, however, to explain a stream, the growth of capital per unit of time. We have to explain, therefore, not only how much more capital the users want to take into use, but also how rapidly they do it (or how rapidly new capital goods are produced).2 In the first model below I assume that when, for example, changes in the price-situation make capital users want more capital, the immediate result will be an increase in the price of capital goods. Such a price-increase will then induce the producers of these goods to speed up production. In the second model below I operate not only with a price of capital goods ready for delivery today, but a schedule of prices, depending on the time of delivery. The users and the producers of capital goods will, through their bargaining, decide both the amount of new capital and the time of delivery, which together determine the level of investment. Within both models I have studied how a change in the rate of interest will affect investment and the substitution of capital for labour.