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MEANING OF
MARGINAL EFFICIENCY OF CAPITAL IN SIMPLE WORDS
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MACRO
ECONOMICS/PRINCIPLES OF ECONOMICS
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MARGINAL EFFICIENCY OF CAPITAL
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REFERS TO EXPECTED RATE OF RETURN ON NEW
INVESTMENT OR ANEW CAPITAL PROJECT LAUNCHED IN BUSINESS.
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DIALLARD,”
THE MARGINAL EFFICIENCY OF PARTICULAR TYPE OF CAPITAL ASSET IS THE HIGHER RATE
OF RETURN OVER COST EXPECTED FROM AN ADDITIONAL OR MARGINAL UNIT OF THAT TYPE
OF ASSET.
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MARGINAL EFFICIENCY OF CAPITAL IMPLIES THE
INCOME RECEIVED AFTER DEDUCTING THE COST FROM THE RETURN OF AN ADDITIONAL UNIT
OF CAPITAL
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MEANING OF MARGINAL EFFICIENCY
- MEANS EXPECTED
RATE OF RETURN ON INVESTMENT AT PARTICULAR TIME
- MEC OF CAPITAL
IS COMPARED TO THE RATE OF INTEREST
- KEYNESIAN
THEORY SUGGESTED INVESTMENT WILL BE
INFLUENCED BY
- THE MARGINAL
EFFICIENCY OF CAPITAL
- THE INTEREST
RATE
c. SUPPOSE FOR MAKING INVESTMENT OF RS 100 IF MEC IS 10% AND INTEREST IS 8%
THEN WE WILL MAKE THE INVESTMENT. MEC IS 7% AND RATE OF INTEREST IS 8% WE WILL
NOT MAKE INVESTMENT
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DETERMINANTS
OF MEC
1. PROSPECTIVE YIELD:-THE PROSPECTIVE YIELD OF AN ASSET IS THE AGGREGATE NET
RETURN EXPECTED FROM IT DURING THE LIFE TIME OF USE. THE PROSPECTIVE YIELD OF A
NEWLY PLANNED INVESTMENT PROJECT IS CALCULATED FROM MARGINAL REVENUE
PRODUCTIVITY-ASSOCIATED VARIABLE COST
2. SUPPLY PRICE:-THE SUPPLY PRICE OF CAPITAL ASSET IS THE COST OF PRODUCING A
NEW ASSET OF THAT KIND, NOT THE SUPPLY PRICE OF AN EXISTING ASSET.
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RATE OF INTEREST
1. INTEREST IS THE COST OF MONEY INVESTED.
2. KEYNES ,: INTEREST IS THE REWARD FOR PARTING WITH LIQUIDITY
3. IF MONEY IS BORROWED FROM OTHERS TO INVEST, INTEREST WILL HAVE TO BE PAID ON
IT.
4. ON THE CONTRARY IF THE INVESTOR HAS HIS OWN MONEY HE COULD USE IT PURCHASING
SECURITIES AND BONDS WHILE INVESTING HE HAS TO SACRIFICE SUCH INCOME
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