Marginal Producuctivity of Capital

JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

SCHOOL OF HUMAN RESOURCES AND DEVELOPMENT

DEPARTMENT OF HUMAN RESOURCE

KAKAMEGA CBD CAMPUS

BACHELOR OF COMMERCE

ASSIGNMENT

PRODUCTION ECONOMICS

HBC 2234

Marginal Productivity of Capital

Marginal Productivity of Capital

INTRODUCTION

Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.

What is Marginal productivity of Labour?

The marginal productivity of capital, also known as 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 expected income.

The term “marginal efficiency of capital” was introduced by John Maynard Keynes in his General Theory, and defined it 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”.

The Marginal efficiency of capital displays the expected rate of return from investment, in a particular given time. The marginal efficiency of capital is compared to the rate of interest. It represents the market rate of interest at which the investment becomes viable. Also called marginal productivity of capital.

This theory suggests that investment will be influenced by:

1. The marginal efficiency of capital, and

2. The interest rates

Generally, a lower interest rate makes investment relatively more attractive. For example if interest rates were 3%, then firms would need an expected rate of return of at least 3% from their investment to justify investment and if the...