of Figure 15-6. There are three possible causes of an increase in the
demand for financial capital.
- Population and Income Growth
As the economy’s total income grows, either through growth in
population or in per capita income, the demand for goods and services
increases. This increase in the demand for firms’ products leads to an
increase in the marginal revenue product (MRP) of capital. As we saw
earlier in the chapter, an increase in capital’s MRP leads to an increase in
the economy’s investment demand. The gradual but ongoing growth in
the economy’s total income is an important explanation for the gradual
increase in the economy’s investment demand.
- Technological Improvement
Over time, there are technological improvements in the quality of factors
of production. This is especially true for physical capital. Many of these
improvements occur when obsolete or worn-out capital is replaced by
new and better capital. For example, the dramatic improvements in
computer and information technology over the past three decades have
led to large increases in the marginal product of some types of capital and
thus an increase in the economy’s investment demand.
- Policies to Encourage Investment
Over the years, Canadian federal and provincial governments have
designed policies to encourage firms to increase their investment in