Thursday, March 18, 2010

marginal efficiency of capital

any individual, before investing at any place, has to think over the profits that can be earned from the investment. so, any investor when invests in the new sector definite amount of returns will be yielded from the investment which will be the profit. that is marginal productivity of capital is the marginal efficiency of capital. any entrepreneur when investing on new capital assets compares the expected rate of returns with the interest that will be required to be paid when buying such capital assets. if the return form the investment is more than the interest amount that is required for its payment then the investor will be encouraged to invest in such a new sector. contrary to this if the return from the investment is less than the interest rate, then no investor will be ready to invest in such a sector. so, expected profit that can be obtained in the future for the investment is known as the marginal efficiency of capital. this sort of profit is expected form the additional capital or additional investment. the amount of money that any entrepreneur invests on capital goods which produce any goods is known as supply price. this is also known as replacement cost. this investment on machines which are used in production is also known as proposed investment. this kind of investment which is expected to earn income in addition to the amount separated for depreciation fund is known as expected income.
so, any entrepreneur before investing has to think over three things. they are:
1. Cost of capital assets
2. Prospective yield from the life time of capital assets.
3. Rate of interest.

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