What is the difference between marginal efficiency of capital and marginal efficiency of investment?
Table of Contents
- 1 What is the difference between marginal efficiency of capital and marginal efficiency of investment?
- 2 What is marginal efficiency of investment distinguish between MEC and Mei?
- 3 How is MEC calculated?
- 4 What is the formula of MEC?
- 5 Why is marginal efficiency of capital important?
- 6 What is the relation between MEC and Mei?
What is the difference between marginal efficiency of capital and marginal efficiency of investment?
The rate of return on new investment, or the marginal efficiency of capital, is denoted as e. In other words, e may be interpreted as an internal rate of return to the firm, whereas e is the external rate of return (i.e., the rate at which the firm can lend its surplus money at the market rate of interest).
What is marginal efficiency of investment distinguish between MEC and Mei?
Solution
| Sr No | Marginal Efficiency of capital | Marginal Efficiency of Investment |
|---|---|---|
| 4 | It is a “stock” concept | It is a “flow” concept |
| 5 | It determines the optimum capital stock in an economy at each level of interest rate | It determines the net investment of the economy at each interest rate given the capital stock. |
What is the relation between the supply price of capital and marginal efficiency of capital?
Marginal efficiency of capital is the rate return expected to be obtainable on a new capital asset over its life time. J.M. Keynes defines marginal efficiency of capital as the: “The rate of discount which makes the present value of the prospective yield from the capital asset equal to its supply price”.
Is MEC and Mei same?
MEC was first introduced by J.M Keynes in 1936. According to him it is an important determinant of autonomous investment. Marginal Efficiency of Investment(MEI) is the expected rate of return on investment as additional units of investment are made under specified conditions and over a atated period of time.
How is MEC calculated?
Calculate MEC. Divide the sum of the projected profits from the investment (over the item’s service life) by the total investment under consideration.
What is the formula of MEC?
To find out MEC of the new capital asset, we would simply calculate the ratio (expressed as a per cent) of the expected annual net return [Rs. 500 (prospective yield) divided by Rs. The MEC is 5\%, i.e., the expected annual net return on the investment of Rs. 10,000 is 5\%.
What is difference between MEC and Mei?
Why MEC is downward sloping?
The downward slope of the MEC curve indicates the negative relationship between the level of investment and the MEC. First, increase in the investment on one hand reduces the marginal productivity of the capital asset due to operation of the diminishing returns.
Why is marginal efficiency of capital important?
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. This theory suggests investment will be influenced by: The marginal efficiency of capital.
What is the relation between MEC and Mei?
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