Page 95 - DECO402_Macro Economics

Macroeconomic Theory

Notes When the rate of interest is fall and become 9%, then firm consider profitable the three projects of 11,
crores. More investment will increase the total quantity of capital clearly. Let, in starting firm have 20
crores starting stock. On the 13% interest rate, total capital stock becomes 25 crores and then becomes
31 crores, when the rate of interest falls 9%. Firms did not start any new project, whenever the rate
of interest is not fall.

Table 10.2 List of MEC

Investment project Price of project Marginal efficiency of capital
(crore rupees) (MEC)
A 5 15%
B 2 12%
C 4 10%
D 1 8%
E 3 6%

In figure 10.3, these five future projects are
classified in decreasing order of profit. The
dark line of that figure represents the list of Marginal Efficiency of Cost (M E C)
marginal efficiency of capital of personal
firms. So, the list of marginal efficiency of
capital of personal firms are continues in
steps. If think about the list of marginal
efficiency of capital of all firms, then we
will get infinite investment projects. When
it represent in a figure, then it is a smooth
curve because of group process. Investment Expenditure
In figure 10.4, marginal efficiency of capital
curve show the possible level of investment Figure 10.3 List of marginal efficiency of capital
of different values of marginal efficiency of
capital. Marginal efficiency of capital is shielding
at downward, shows the negative relation between
the marginal efficiency of capital and level of
investment. When the level of investment increased
from I to I , the marginal efficiency of capital is fall
0
1
from (MEC) i to i .
0 1
There are two reasons of apposite relation between
marginal efficiency of capital or investment. First, Marginal Efficiency of Cost (M E C)
marginal productivity of capital property is less
because of the affect of diminishing effects. Second
side, the price of things reduces because of the
increment in production. So required returns
become reduce. Second, when real capital stock
increased, then its supply prices will increased
because of the increment demand of property.
Investment (I)

Figure 10.4 : Marginal efficiency curve of capital

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