MEC

MULTIPLIER
ACCELERATOR
MARGINAL EFFICIENCY OF CAPITAL
(MEC)

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 MARGINAL EFFICIENCY OF CAPITAL
(MEC)
 THE TERM “MARGINAL EFFICIENCY OF
CAPITAL” WAS INTRODUCED BY
JOHN MAYNARD KEYNES IN HIS
GENERAL THEORY.
 THE MARGINAL EFFICIENCY OF CAPITAL
(MEC) IS THAT RATE OF DISCOUNT WHICH
WOULD EQUATE THE PRICE OF A FIXED
CAPITAL ASSET WITH ITS
PRESENT DISCOUNTED VALUE OF EXPECTE
D INCOME
.
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 MARGINAL EFFICIENCY OF CAPITAL
(MEC)
 JOHN MAYNARD KEYNES DEFINED MEC AS
 “THE RATE OF DISCOUNT WHICH WOULD
MAKE THE PRESENT VALUE OF THE SERIES
OF ANNUITIES GIVEN BY THE RETURNS
EXPECTED FROM THE CAPITAL ASSET
DURING ITS LIFE JUST EQUAL ITS SUPPLY
PRICE”.

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 MARGINAL EFFICIENCY OF CAPITAL
(MEC)
 THE MEC IS THE NET RATE OF RETURN THAT IS
EXPECTED FROM THE PURCHASE OF
ADDITIONAL CAPITAL. IT IS CALCULATED AS THE
PROFIT THAT A FIRM IS EXPECTED TO EARN
CONSIDERING THE COST OF INPUTS AND THE
DEPRECIATION OF CAPITAL.
 IT IS INFLUENCED BY EXPECTATIONS ABOUT
FUTURE INPUT COSTS AND DEMAND.
 THE MEC AND CAPITAL OUTLAYS ARE THE
ELEMENTS THAT A FIRM TAKES INTO ACCOUNT
WHEN DECIDING ABOUT AN INVESTMENT
PROJECT.
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 MARGINAL EFFICIENCY OF CAPITAL
(MEC)
 THE MEC
 NEEDS TO BE HIGHER THAN THE RATE OF
INTEREST, R,
 FOR INVESTMENT TO TAKE PLACE.
 THIS IS BECAUSE THE PRESENT VALUE PV OF
FUTURE RETURNS TO CAPITAL NEEDS TO BE
HIGHER THAN THE COST OF CAPITAL, C K.

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