So let's introduce two more important concepts here, the idea of savings and investment. So when we say savings in this case, we're thinking about measuring the amount of output being consumed right now compared to what is actually being produced. So current consumption, consumption being the output consumed would be the output that's like used up right now, right? We're actually consuming it, right? When we produce things in our economy, things that are being purchased by the final user, things that are being used up by the final user, right? When we have current consumption and current output, well, that's what's being produced in the same time period, right? So when we think about savings, that means that consumption is less. The current consumption is less than the current output, right? We're producing so much in our society but we're saving some. We're not going to consume it all right now. We're going to save some of it for future consumption, okay? So savings is this idea of consuming less than what's produced. Compare that to investment. So investment is where we're taking the current resources, things that we have now, but instead of using them for current consumption, what we're going to do is we're going to devote them to increase our future output. So that in future years, we can output even more to have more room for savings and more room for consumption in future years.
Okay? So savings is the idea of we're consuming less than the output where investment is where we're investing into the future. So we're increasing future output by taking current resources and devoting them to the future output, okay? Now, when we say investment, in your head, you might think of investment and you might think of, "Oh, I'm going to buy an investment. I'm going to buy stocks on the market." Well, when we're taking economics, we don't think of that in the same way. We talk about financial investments and economic investments. So when you think about an investment, you generally think of something like stocks, bonds, right? Things like that are financial investments, maybe like a mutual fund. Right? These all represent financial investments that you can make. However, in this class when we talk about investment, we're generally going to be talking about economic investment. So when you see the word investment, you need to think about economic investment, which is generally investments that firms make like a business might make to increase their production in the future, right? Just like in our definition.
So this could be like building factories, right? Putting money into machinery, right? Buying new machinery to increase production, putting money into research and development, R and D, research and development to increase future production, right? So we're taking current resources and building a factory. So even though that factory isn't going to help us right now, in future years, we're going to get more production out of it or machinery or researching a new technology that's going to make production faster in future years, right? So economic investments, that's the key difference here, right? Where a financial investment is something you might have been used to, economic investment, they're focused on increasing future output. Okay?
So when a firm is deciding to invest, they have to make a logical decision about investment, right? They have to think why should we invest in the future instead of producing what we can right now? Why should we take our resources and invest them in the future? So they're going to make those decisions if they have strong expectations of the future, right? So when they make investment decisions, when a firm makes an investment decision, they're going to have to have some sort of expectation about the future. So if they have a good expectation about the future, well then they're going to invest current resources into increasing future production so that they can make more money over time, right? So that would be an idea of why they would invest in the future. However, if they're pessimistic, the opposite, if they're pessimistic about the future, how is that going to affect our future output? Well, it's going to lead to less investment, right? Because if they're pessimistic about the future, they're not going to invest into factories and machinery into the future and since there's less investment, well, it's going to have less future consumption because we are not devoting those resources to future consumption.
Okay? So these expectations play a large role in how our economy flows. If they have good expectations about the future, well, they're going to invest in the future. Right? Now, what if those expectations turn out to be wrong, right? A firm might make expectations of, we expect the demand for our product to be like this or we expect to be able to supply this much of this product, right? Well, if those expectations end up being wrong, we have what's called shocks. So demand shock, well that's related to demand, right? We had an expectation about demand and then we had an unexpected change in what the level of demand was, right? We expected, oh, we were going to be able to sell 10,000 cars but we weren't able to sell 10,000 cars, meaning only able to sell 8,000 or it can go the other way. We expected 10,000 and we were able to sell 12,000. We don't have enough cars now. How is that going to affect the economy? It's going to have severe effects on the price levels, on shortages of inventory, things like that. Same thing can happen with supply as well, right? Supply. There could be an expected level of supply but maybe some sort of raw material isn't available and they're not able to create the supply they want, right? Some sort of expectation is not met. So that's when we have a demand shock or supply shock. That is when we have an expectation that is not met. So let's talk about these in a little more detail in our example. Let's pause here and we'll go through that example in the next video.
