factors influencing the marginal productivity of capital can be dividend into parts viz. short run and long-run factors.
(a) short run factors
in the short run, marginal productivity of capital and investment are influenced by the following factors.
1. consumer's demand: current demand for goods greatly affects the capital investment level in the economy. if the consumers continuously increase the current demand for goods, then there will a be and excessive increase in current investment. but contrary to this , if current demand for goods go on decreasing, then the investors won't be attracted or encouraged for investment. as a result , current investment will decrease.
2. level of income: if in the economy increase in wage and the price of goods increase the income if the people , then demand for increase the short run investment. contrary to this , if decrease in wage and the price of goods decrease the income of the people then the demand for goods will also decrease. so, decrease in the income level as a result of decrease in demand for goods will discourage the investors towards investment. as a result investment will increase.
3. expected demand: if the investoes expect the increase in demand for goods and services in the future, then the marginal productivity of capital increases currently and will be encouraged for investment. if decrease in demand is expected in the future, then the investors will be discouraged for current investment. in such a situation, investment will decrease . that is short run investment will decrease.
4. propensity to consume: of people consume most part of their income then demand for various goods will increase. if propensity to consume of people in high, then to meet the demand the investors will increase the investment. but contrary to this of consumer's propensity to consume is low and propensity to save it high, then demand for goods will decrease. due to decrease in such a situation, investment will decrease.
5. cost: if there is a possibility of crease in the production cost of various goods and services in the future, then marginal efficiency of capital will be more and the investors will be encouraged for investment. but contrary to this, if there is a possibility of increase in the production cost of goods and services in the future, the marginal efficiency of capital will be less and the current investment will decrease.
6. price and returns: price and returns also influence the encouragement in investment. if there is a possibility of increase in the price of goods in the future, then current investment increases because investors will expect more returns from this . this is because in such a situation, marginal productivity of capital will also be more. but if there is a possibility of decrease in the prices of goods in the future, then the investors will invest less because they will receive less returns.
7. uncertainty: if encouraging situation prevails in the industrial and business sector, then marginal productivity of capital increases. this discouraging situation prevails in the industrial and business sector, then marginal productivity of capital decreases. as a result, the investoes will decrease their investments.
8. government policy: the economic policy under taken by the government also affects the investment. if the government shifts various unnecessary burden of taxes on entrepreneurs and businessmen or nationalities the industries then marginal productivity of capital will decrease.as a result in the investors will be discouraged from investing. this will result in the decrease in investment. but contrary to this, if the government with the objective of encouraging the entrepreneurs and businessmen towards investment removes unnecessary taxes and provides various facilities the private entrepreneurs will be encouraged for investment. as a result, current investment will increase.
9. business stability: if there is a suitable environment for the business stability in the economy, then there will be an expectation of high returns from industrial investment. as a result of this , investors will be encouraged to invest at current situation. but contrary to this , of there is no suitable environment for industrial and business investment in the economy, then marginal productivity of capital will decrease resulting a decrease in investment.
10. political stability: political stability in the country also determines the investment. if there is political stability and stable government in the country, then the investors will be encouraged to invest. this will result in the increase in investment. contrary to this, if there is political instability and unstable government changing from time to time in the country, then the government policies will be ever changing. this will discourage the investors from investing and as a result the investment will decrease.
(b) long-run factors
long-run factors that influence the marginal productivity of capital and investment can be explained as follows:
1. population growth rate: population growth rate of a country has a long-run influence on investment. if the country's population growth rate is high, then permanent and stable market will be created for various consumption goods in the economy. so, to fulfill the demand of increased population, investment on the production of consumption goods will increase. if the size of the market for consumption goods will also be small. this won't encourage the investors towards investment. that is, investment will decrease.
2. development of new territories: the objective of the government will be to develop backward sectors successively. in such a situation, in the government undertakes policies to develop backward sectors successively, then new sectors will be open for because new cities will be developed. this will speed up the business as well as industrial development along with the economic development of the country. as a result, marginal productivity of capital will increase.
3. utilisation of capital equipment: if at current period capital equipments are not fully utilised, then to supply as per demand various capital equipments should be used with the increase in the long-run investment. this will increase the marginal productivity of capital.
4. technological progress: due to development of new technologies, the long-run investment increases. if various technologies are improved or new technologies are invented, then this will increase the product efficiency. this will reduce the price of produced goods and the consumers will start getting goods at new investment sectors. this will result in the increase in marginal productivity of capital. thus, increased marginal productivity of capital will encourage the investors towards the investment on new capital goods. development of new means of transportation, new house, etc. come under this, this will provide various facilities to the people.
5. new products: new products available in the market also influence the marginal productivity of capital and investment. if the probability of sale of new product in the market in very high, then investment in such sector will have high possibility of earning excessive profit. in such a situation, marginal productivity of capital will be high. for example, invention of television and computer has widely increased the demand for these products and every now and then, new types and new models of television and computers are produced. due to such new products investment increases.
6. rate of current investment: if at current period investment in any sector is very high, then it will be meaningless to invest more in that sectors. of invested in such sectors, the marginal productivity of capital will be less. as a result, investors will be discouraged from investment or they won't be interested in investing.
7. liquid assets: liquid assets with the investors also influence the investment, if more liquid assets is with the investors, then they are encouraged for more investment because they desire to earn more profits form such investments, contrary to this, if investors possess less liquid assets or not at all, then they won't be encouraged towards investment.
(a) short run factors
in the short run, marginal productivity of capital and investment are influenced by the following factors.
1. consumer's demand: current demand for goods greatly affects the capital investment level in the economy. if the consumers continuously increase the current demand for goods, then there will a be and excessive increase in current investment. but contrary to this , if current demand for goods go on decreasing, then the investors won't be attracted or encouraged for investment. as a result , current investment will decrease.
2. level of income: if in the economy increase in wage and the price of goods increase the income if the people , then demand for increase the short run investment. contrary to this , if decrease in wage and the price of goods decrease the income of the people then the demand for goods will also decrease. so, decrease in the income level as a result of decrease in demand for goods will discourage the investors towards investment. as a result investment will increase.
3. expected demand: if the investoes expect the increase in demand for goods and services in the future, then the marginal productivity of capital increases currently and will be encouraged for investment. if decrease in demand is expected in the future, then the investors will be discouraged for current investment. in such a situation, investment will decrease . that is short run investment will decrease.
4. propensity to consume: of people consume most part of their income then demand for various goods will increase. if propensity to consume of people in high, then to meet the demand the investors will increase the investment. but contrary to this of consumer's propensity to consume is low and propensity to save it high, then demand for goods will decrease. due to decrease in such a situation, investment will decrease.
5. cost: if there is a possibility of crease in the production cost of various goods and services in the future, then marginal efficiency of capital will be more and the investors will be encouraged for investment. but contrary to this, if there is a possibility of increase in the production cost of goods and services in the future, the marginal efficiency of capital will be less and the current investment will decrease.
6. price and returns: price and returns also influence the encouragement in investment. if there is a possibility of increase in the price of goods in the future, then current investment increases because investors will expect more returns from this . this is because in such a situation, marginal productivity of capital will also be more. but if there is a possibility of decrease in the prices of goods in the future, then the investors will invest less because they will receive less returns.
7. uncertainty: if encouraging situation prevails in the industrial and business sector, then marginal productivity of capital increases. this discouraging situation prevails in the industrial and business sector, then marginal productivity of capital decreases. as a result, the investoes will decrease their investments.
8. government policy: the economic policy under taken by the government also affects the investment. if the government shifts various unnecessary burden of taxes on entrepreneurs and businessmen or nationalities the industries then marginal productivity of capital will decrease.as a result in the investors will be discouraged from investing. this will result in the decrease in investment. but contrary to this, if the government with the objective of encouraging the entrepreneurs and businessmen towards investment removes unnecessary taxes and provides various facilities the private entrepreneurs will be encouraged for investment. as a result, current investment will increase.
9. business stability: if there is a suitable environment for the business stability in the economy, then there will be an expectation of high returns from industrial investment. as a result of this , investors will be encouraged to invest at current situation. but contrary to this , of there is no suitable environment for industrial and business investment in the economy, then marginal productivity of capital will decrease resulting a decrease in investment.
10. political stability: political stability in the country also determines the investment. if there is political stability and stable government in the country, then the investors will be encouraged to invest. this will result in the increase in investment. contrary to this, if there is political instability and unstable government changing from time to time in the country, then the government policies will be ever changing. this will discourage the investors from investing and as a result the investment will decrease.
(b) long-run factors
long-run factors that influence the marginal productivity of capital and investment can be explained as follows:
1. population growth rate: population growth rate of a country has a long-run influence on investment. if the country's population growth rate is high, then permanent and stable market will be created for various consumption goods in the economy. so, to fulfill the demand of increased population, investment on the production of consumption goods will increase. if the size of the market for consumption goods will also be small. this won't encourage the investors towards investment. that is, investment will decrease.
2. development of new territories: the objective of the government will be to develop backward sectors successively. in such a situation, in the government undertakes policies to develop backward sectors successively, then new sectors will be open for because new cities will be developed. this will speed up the business as well as industrial development along with the economic development of the country. as a result, marginal productivity of capital will increase.
3. utilisation of capital equipment: if at current period capital equipments are not fully utilised, then to supply as per demand various capital equipments should be used with the increase in the long-run investment. this will increase the marginal productivity of capital.
4. technological progress: due to development of new technologies, the long-run investment increases. if various technologies are improved or new technologies are invented, then this will increase the product efficiency. this will reduce the price of produced goods and the consumers will start getting goods at new investment sectors. this will result in the increase in marginal productivity of capital. thus, increased marginal productivity of capital will encourage the investors towards the investment on new capital goods. development of new means of transportation, new house, etc. come under this, this will provide various facilities to the people.
5. new products: new products available in the market also influence the marginal productivity of capital and investment. if the probability of sale of new product in the market in very high, then investment in such sector will have high possibility of earning excessive profit. in such a situation, marginal productivity of capital will be high. for example, invention of television and computer has widely increased the demand for these products and every now and then, new types and new models of television and computers are produced. due to such new products investment increases.
6. rate of current investment: if at current period investment in any sector is very high, then it will be meaningless to invest more in that sectors. of invested in such sectors, the marginal productivity of capital will be less. as a result, investors will be discouraged from investment or they won't be interested in investing.
7. liquid assets: liquid assets with the investors also influence the investment, if more liquid assets is with the investors, then they are encouraged for more investment because they desire to earn more profits form such investments, contrary to this, if investors possess less liquid assets or not at all, then they won't be encouraged towards investment.
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