Can You Write A Short Note Of Marginal Efficiency Of Capital For Me?

In the modern world, the investments involve a great amount of risk. The entrepreneur undertakes investment keeping in view the future profitability of the project. The future is always uncertain. There is every unlikelihood that the expected rate of profit may disappear due to a change in the demand for product. J. M. Keynes has used the term marginal efficiency of capital, for the expected yield from a new unit of capital. The marginal efficiency of capital should be higher than the current rate of interest, if investment is to be worthwhile.

Marginal efficiency of capital is the highest expected rate of the profit, which is likely to be had by the marginal increase in the rate of investment. The business activity is not always smooth. It is subject to fluctuations and the rate of profit is affected by these changes. It is the perspective yield which gives the marginal efficiency of capital is most important characteristic that is instability.

The marginal efficiency falls as investment increase. There are two reasons for this: a. the installation of a larger number of similar machines lead to a reduction in their perspective yields just as consumption of more units lead to a reduction in marginal utility. b. the prices of such machines will go up their demand increases. This will add to the cost. Thus cost goes up on one hand, and the market prices of their production increases. Hence, the marginal efficiency of capital goes down as investment increases.

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