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Consumption and Investment Functions — Economics STD 12 — Question

Tamilnadu BoardEnglish MediumSTD 12EconomicsConsumption and Investment Functions3 Marks
Question
Explain the Marginal Efficiency of capital?
✓

Answer

Marginal Efficiency of Capital:
  1. MEC was first introduced by J.M Keynes in 1936 as an important determinant of autonomous investment.
  2. The MEC is the expected profitability of an additional capital asset.
  3. It may be defined as the highest rate of return over cost expected from the additional unit of capital asset.
  4. Meaning of Marginal Efficiency of Capital (MEC) is the rate of discount which makes the discounted present value of expected income stream equal to the cost of capital.
MEC depends on two factors:
  1. The prospective yield from a capital asset.
  2. The supply price of a capital asset.
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