Shape of the MEC curve: Normally, MEC curve slopes deserved from left to right.

Y Mariginal Efficiency Of capital unit MEC

Real Planned Investment per period

The marginal efficiency of capital curve slopes downward from left to right

Y-axis denotes the marginal efficiency of capital and the X-axis denotes the amount of real planned investiment.The negative slope of the MEC curve indicates that the marginal efficiency of every type of asset will diminish. As investment in it increases. The main reason for this is that the prospective yield of any type of asset will decline as more units of it are produced.Second, the supply price of the asset may increase since a large volume of investment will put pressure on the facilities for producing that type of capital. The larger the volume of investment within a given period of time, the lower will be the prospective annual returns and the higher will be the replacement cost.Accordingly, the larger the volume of investment, the lower will be rate of return over cost, i.e., the marginal efficiency of capital.

DETERMINATION OF REAL INVESTMENT EQUILIBRIUM:

The MEC Curve is the same. We assume that the rate of interest is 8 per cent and is invariant with respect to the amount of investment.Therefore; the interest curve PR becomes parallel to X-axis. The equilibrium amount of investment is determined where the MEC curve intersects PR i.e., the curve representing the rate of interest. In the diagram, equilibrium amount of real planned investment is ol per year. If the rate of interest is lower, the amount of real planned investments would be larger.Conversely; if the rate interest is higher the amount of real planned investment would be smaller.

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Marginal 12 Efficiency of Capital 8 p Rate of interest R

4 O I Planned Investment X

MEC

Equilibrium amount of real planned investment is determined at the point where MEC=Rate of interest

CHARACTERISTICS OF THE MEC SCHEDULE:

As analysed earlier, the MEC schedule expresses a functional relationship between the marginal efficiency of capital and the amount of real planned investment.Obviously, the amount of real planned investment is the critical variable of the MEC schedule. But there are some other variables whose marginal response coefficients are such that in the short period they can be assumed to have an invariant value. These are called the parameters of the marginal efficiency of capital schedule. The five principal parameters are as follows: The communitys stock of real capital Techniques as given by the production function The supply conditions of capital assets The business expectations The degree of uncertainty.