1. Marginal efficiency of capital

2. Introduction
In Irving Fisher was first economist to make use of concept MEC
He gave it a name Rate of return over Cost.
In simple word, MEC means “ expected rate of profitability of new investment”
Its calculation depends upon 2 factors:
Amount of profit, expected by investing one more unit of capital.
Cost of capital asset.
MEC can also b calculated by deducting its cost from total assets.

3. EXAMPLE:
Suppose the price of machine is Duration of life of machine is 10 years, expected income during this period is NOW Total Profit of machine is = Average profit per year /10 = 3000 MEC = 3000/30000 *100= 10%

4. definitions
In the words of Kurihara , “ MEC is the ratio between the prospective yield of additional capital goods and their supply price”
In the words of W.C. Peterson , “ The rate of return over cost relates the expected yield of a capital good to its supply price . It is the relationship that Kyenes calls MEC.

5. DETERMINANTS OF MEC 1. Prospective Yield
There are 2 determinants of MEC :-
1. Prospective Yield
It is the aggregate net return expected from it during its whole life.
With rise in price , prospective yield increases and with the fall in price ,it decreases.

6. Supply Price
It is the cost of producing a new asset of that kind , not the supply price of an existing asset.
It is also called Replacement Cost.

7. DETERMINATION OF MEC
Keynes has explained MEC as a discount rate which makes the prospective yield of a capital asset equal to its supply price
Supply price = Discounted prospective yield
SP= Py1 + Py2 + Py3 +………..+ Pyn
(1+m) (1+m)² (1+m)³ (1+m)
if life time of a machine is n year and total prospective
yield is Py , then
SP= Pyn or (1+m)n SP= Py
(1+m)
Or (1+m)n = Py SP
Where m- MEC

8. MEC SCHEDULE
It is a schedule which expresses relationship between amount of investment and MEC
INVESTMENT
MEC 50
100
200
400
600
12% 9% 6% 5% 2%

9. MEC/ROI R R1 O
M M1
INVESTMENT

10. Causes of decline in mec
Reduction in Selling Prices
When more investment is made in production of commodity, supply of commodity tends to increase. As a result its prevailing market price begins to fall. In this way prospective yield also falls . Consequently , MEC of capital begins to decline .
Increase in Cost of Production
Increased investment of a particular type raises their demand for a particular type of capital asset raises its demand and hence its supply increases. Other things remaining constant higher the supply price, lower the MEC .
Diminishing Productivity
As a result of increase in capital stock, principal of diminishing productivity begins to operate. Use of every additional unit of capital is followed by diminishing physical production. Thus prospective yield and MEC fall despite price remaining constant.

11. MEC AND RATE OF INTEREST
An investor while taking investment decision makes a comparison between MEC and rate of interest.
When rate of interest is less than MEC ( ROI< MEC) investor makes more investment
When rate of interest is equal to MEC (ROI= MEC) investor stop making any more investment
When rate of interest is more than MEC (ROI> MEC) no investment will be made

12. Supply Price Annual Yield MEC 4ooo 200 Neutral Rate of Interest
Effect on inducement to invest
5000
4ooo
200 4% 5%
Neutral
Favourable
Unfavourable