Question

If the return on capital is constant over time, explain why technological change causes capital investment.

Answer 1

Dear Student,

Please find below answer to your questions

Abstract

It is true that return on capital is constant over time still people willing to do investment in capital assets, The primary reason behind this are technological changes and different needs of consumers.

Therefore to obtain sustainable and constant growth, it is very necessary to invest more resources in the development of factor-saving technologies in the factor that has the smaller supply elasticity.

The main propose of this investment are profit maximization in perfectly competitive environment. Underlying factors to this technological change are cost of investment and hiring skilled as well as unskilled labour to operate new invested capital equipment.

There are two determinants of technological progress one is changing the requirement of production factors such as automation, involvement of new process or the specific requirement of product quality and second is adjustment cost that will be incurred during the set up of new technology.

If we look at the developed countries over the period of time per- capita output and physical capital have increased gradually, but the ratio between physical capital to output and physical capital to income share of labour remains same since the industrial revolution.

The higher factor prices i.e. Cost of goods and services which are increased due to inflation and modernisation of production process that ultimately lead to invention. Due to ultimate result of invention new technological equipment are introduced that cause to make investment by business owners.

Though it is not possible to to gain profit by optimum utilization of this new technology in short period by achieving maximum output, It will give benefits to save cost on other factors such as labours  those are involved in manual operation and cost of land which is utilized to perform the manual operation.

Due to maximum production capacity firm will meet the demand of domestic market and will start to export the products to other countries by increasing the size of markets.

Also capital investment will lead to optimum utilization of natural resources. For Example, In Brazil near about 70 % farmers are involved in harvesting of Coffee and its related agricultural activities. In this case investment in capital equipment will help to speed up the production of coffee and Export Business.

However Capital investment will ultimately lead to quality and quantity improvement in production and thereby will increase the revenue, It will also generate employment and gradually will support to increase the per capita income of country with high GDP growth.

--------------

Hope my answer have cleared all your queries, I really appreciates your positive feedback !!

Thank You !!

--------------