What is marginal efficiency of capital? Why MEC curve slope downward?
|NU Year||Set: 3.(a) Marks: 4 Year: 2012|
The marginal efficiency of capital displays the expected rate of return on investment, at a particular given time. The marginal efficiency of capital is compared to the rate of interest.
Keynes described the marginal efficiency of capital as:
“The marginal efficiency of capital is equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal to its supply price.” – J.M.Keynes, General Theory, Chapter 11
This theory suggests investment will be influenced by:
1.The marginal efficiency of capital
2. The interest rates
Price has an inverse relationship with demand leads the demand curve to slope downwards. The demand and supply curves are graphical expressions of the behaviors of a market following individual demands.
The managers use the demand graph to measure demand schedules and future consumption patterns in a competitive market. When they intersect the demand graph with a supply graph, they find equilibrium price on which equilibrium supply can maximize the profits. We know consumers are ready to pay equilibrium price for equilibrium supply which can be produced without any surplus or shortage.