Difference between MEC and MEI| Macroeconomics

MEC

MEC and MEI

Difference between Marginal Efficiency of Capital (MEC) and Marginal Efficiency of Investment( MEI)| Macroeconomics

Marginal Efficiency of Capital(MEC)  is the rate of discount which makes the discounted present value of expected income stream equal to the cost of capital.MEC was first introduced by J.M Keynes in 1936.According to him it is an important determinant of autonomous investment.

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 atated 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;business firms always cannot raise the price of their product and services to increase profit.

The concepts of marginal efficiency of capital(MEC) and marginal efficiency of investment (MEI) seem similar .There are however some basic differences between MEC and MEI.Some of the basic differences between MEC and MEI are as follows:

Marginal Efficency of Capital(MEC) Marginal Efficiency of Investment(MEI)
1)MEC is based on a given supply price for capital. 1)MEI is based on the induced change in the price due to change in the demand for capital.
2)MEC represents the rate of return on all successive units of capital without regard to existing capital. 2)MEI shows the rate of return on just those units of capital over and above the existing capital stock.
3)In MEC the capital stock is taken on the horizontal axis of diagram. 3)In MEI the amount of investment is taken on the horizontal axis of diagram.
4)The MEC is a “stock” concept. 4)The MEI is a “flow” concept.
5)The MEC determines the optimum capital stock in an economy at each level of interest rate . 5)The MEI determines the net investment of the economy at each interest rate,given the capital stock .

 

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