What is marginal efficiency of capital? Why MEC curve slope downward?

Subject | Economics |
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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.