Firms & Production
Microeconomic Decision Makers
Investment is spending by firms on capital goods, such as machinery, equipment, buildings and technology.
Investment is one of the most powerful ways to raise productivity. When a firm invests in better capital equipment, IT systems or software, its workers can produce more output per hour and to a higher quality, so productivity rises. Higher productivity lowers the average cost of each unit, which can let the firm cut prices, raise profits or do both.
The link runs the other way too. A fall in can leave a firm using older, less efficient equipment, which raises its average costs of production, pushes up prices and can reduce workers' productivity and skills over time. Investment in training alongside new machinery matters, because workers need the skills to use the new capital effectively.
Common exam question
Whether investment in new capital is beneficial
Question: Discuss whether or not investment in new capital benefits consumers or the economy (8 marks).
Asked in 2 of the 11 structured papers. The case for runs through productivity: new capital brings newer technology, so output per worker rises and costs fall, giving consumers lower prices, better quality and new products. For the economy, add jobs, higher total demand and growth. When the question names consumers, keep to consumers, not workers.
Against: prices may rise at first to pay for the equipment, and quality can dip while workers learn it; for the economy, add short-run inflation, fewer consumer goods for now and job losses where machines replace workers. For a fall in investment, the specimen mark scheme credits older equipment raising average costs and prices.