Chapter-21

Question 1

What is corporation tax?

Answer 1

Corporation tax is a tax on the profits of a company.

Question 2

What are the key factors that influence the demand for capital goods?

Answer 2

i) Price of capital goods: An increase in price causes a contraction in demand, while a rise in the price of substitute factors like labor may increase demand for capital goods.

ii) Price of other factors of production: A rise in the price of labor (a substitute) may increase demand for capital goods, while a price rise in a complement decreases demand.

iii) Profit levels: High profits give firms the ability and incentive to buy capital goods.

iv) Corporation tax: A reduction in tax increases the profit available for reinvestment, encouraging the purchase of capital goods.

v) Income levels: Rising real disposable income increases consumption, prompting firms to invest in capital goods.

vi) Interest rates: Lower interest rates reduce the opportunity cost of investing and lower the cost of borrowing. Firms would sacrifice less interest by buying capital goods instead of depositing profits in bank accounts. Borrowing to buy capital goods would also be less costly.

vii) Confidence levels: Greater business confidence leads to more investment in capital goods, while pessimism leads to a decline in investment.

viii) Advances in technology: Technological improvements increase the productivity of capital goods. New and more efficient machinery encourages firms to invest more.

ix) Firms’ expectations about the future: If firms are confident that sales will rise, they will invest more. If they are pessimistic, investment will decline.