Investment is the speculation by firms or individuals on future output. It is a reason for decreased consumption in the present period.
From the Aggregate Expenditure function (AE=C+I+G+NX): Investment is the expenditure of savings for goods at a future time (Injection).
Investment is also a decesion that is made in a current period and then brought to bear in a future period. This lag, creates some areas of complication, known as a Keynes effect. After many years of analysing this investment problem, there is not a clear, simple model for how investment works. This might result from the fact that different industries respond to changes in the underlying investment environment in differnt ways. For example, the investment lag, between planned investment and the realization, is different for a house vs. an apartment building. One simply takes longer to bring to fruition.
Planned investment will be a function of the interest rate. Contracts will be written based on the expected demand in a later period.
Why it mattersEdit
If investment is higher than depreciation, the economy grows. If not, the economy stagnates and depreciation shrinks the economy. In an enviroment of high investment ever greater quantities can be enjoyed in the future. This is one of the reasons Paul Samuelson suggested that the Soviet Union would overtake the US economy because of the forced high savings/investment rate in that economy (consumption in a planned economy is assumed to be lower, therefore savings is assumed to be higher -- nevermind that total incentive to produce should be lower without the chance to choose your balance of saving and consumption).