to be high. During periods of pessimism the MEC is under estimated and so will be low. - - Consumption and Investment Functions b)Long - Run Factors The long run factors which influence the marginal efficiency of capital are as follows: (i) Rate of growth of population: Marginal efficiency of capital is also influenced by the rate of growth of population. If population is growing at a rapid speed, it is usually believed that the demand of various types of goods will increase.
So a rapid rise in the growth of population will increase the marginal efficiency of capital and a slowing down in the rate of growth of population will discourage investment and thus reduce marginal efficiency of capital. (ii) Technological progress: If investment and technological development take place in the industry, the prospects of increase in the net yield brightens up. For example, the development of automobiles in the th century has greatly stimulated the rubber industry, the steel and oil industry etc. So we can say that inventions and technological improvements encourage investment in various projects and increase marginal efficiency of capital.
(iii) Monetary and Fiscal policies: Cheap money policy and liberal tax policy pave the way for greater profit margin and so MEC is likely to be high. (iv) Political environment: Political stability, smooth administration, maintenance of law and order help to improve MEC. (v) Resource availability: Cheap and abundant supply of natural resources, efficient labour and stock of capital enhance the MEC. .
. . Marginal Efficiency of Investment MEI is the expected rate of return on investment as additional units of investment are made under specified conditions and over a period of time. When cost of borrowing is high, businesses are less motivated to borrow money and make investment on different projects because high cost of borrowing reduces profit margin of the business firms; Marginal Efficiency of Capital(MEC) Marginal Efficiency of Investment(MEI) ) It is based on a given supply price for capital.
) It is based on the induced change in the price due to change in the demand for capital.