Induced Investment

Definition: The Induced Investment is a capital investment that is influenced by the shifts in the economy. These investments are made with the intention to generate profit out of such investments.

The change in the cost of raw material, change in the tastes and preferences of customers, increase in the lending or borrowing rates, etc., have a direct impact on the induced investments and to comply with these shifts, a company put efforts to keep the investments viable.

Such investment is governed by the income and the amount of profit a firm can generate. Thus, there is a direct relationship between the amount of investment and the income and profit earned by the firm. If the income and profit tend to increase, the induced investment also increases and vice-versa. This relationship is shown in the graph below:

The figure shows that induced investment increases with the increase in profit/income and in the case of less income or losses the induced investment can even be negative. Hence, we can say, that when the investment increases due to an increase in profit and production, it is known as induced investment.

Such investments are generally made by the private companies when they see a gap between the demand and supply and make profits out of such venture. The induced investments can be abandoned anytime a firm wants if it feels that such investments are no more profitable for the firm.