Demand for capital



Demand for capital

The amount the entrepreneurs want to invest is called demand for capital. It is the amount that the entrepreneurs need to purchase capital goods like equipments, plants, machines, tools etc which can be used for production of goods and services. It is inversely related to interest rate. If the interest rate is high, entrepreneurs want to make less investment and vice versa. It is because of marginal physical productivity.

Symbolically,

economics

In the above table, when interest rate is increased from 4% to 6% and 8% demand for capital ( investment) decreases form Rs 10 billions to Rs 8 billions and Rs 6 billions respectively. If we represent investment with respect to interest rate, we obtain a downwardly sloped curve.