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Tuesday, July 26, 2011

It is the solved assignment of – “What is Marginal efficiency of Capital? Describe the factors determine MEC.” The question has been submitted for MB0042 (Managerial Economics) SMU MBA assignment. There are already Elasticity of Demand and Price Discrimination from MB0042.

Managerial Efficiency of Capital (MEC) – any investment decision depends not only on rate of interest but also whether or not the expected rate of returns on the investment is greater than cost of borrowing the funds,. In these two factors, the MEC is an important factor because MEC is the expected rate of returns from the investment. If the returns expected are low, then the investment is not profitable because in short run, rate of interest is stable.

In MEC, capital means the real productive assets. MEC depends on expected rate of returns of a capital asset over its life time which is also called Prospective Yield and the supply price of capital assets. Any business man will weigh the prospective yield with the supply price before investing.

Factors Affecting MEC:

Expected demand for future – if the demand is expected to increase, the decrease in future, the prospective yield will be low and so the MEC. So the change in expectation gives sudden ups and downs in investment decisions.

Level of income – when people experience gains through reduction in tax or gains in bullish market, the businessmen become more optimistic as they know when income increases, the demand will increase and so the MEC is high and it is the other way when there are huge losses.

When consumption changes – In real life, whenever there is a shift in consumption Function, the MEC also changes.

Business expectation – Investment is something which gives returns only in the future. Any decision on investment depends on the return which the businessmen expect in future. If the environment is optimistic that leads to more expectations in future.

MEC and Business Expectation:

MEC depends on the businessmen’s expectations, which increases due to invention and goes down due to any threat to the returns on investment. It is also affected by the annual spirit of the entrepreneur. That is why investments are not always calculations but also irrational optimism. Business expectations are based on existing events and partly future facts.


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