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The Marginal Efficiency of Capital and of Investment; A Didactic Exercise

Per M. Wijkman
The Swedish Journal of Economics
Vol. 67, No. 4 (Dec., 1965), pp. 263-278
Published by: Wiley on behalf of The Scandinavian Journal of Economics
DOI: 10.2307/3438996
Stable URL: http://www.jstor.org/stable/3438996
Page Count: 16
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The Marginal Efficiency of Capital and of Investment; A Didactic Exercise
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Abstract

This comment gives a simple but rigorous derivation of the function for the marginal efficiency of investment from the function for the marginal efficiency of capital. Only one cause for a discrepancy between the two functions is considered; the traditional example in the literature of a rising supply curve for capital goods. In general, any investment project containing costs which are functions of the speed with which an investment project is carried out will show a discrepancy between the marginal efficiencies of capital and of investment. The marginal efficiency of capital is derived first for micro using a simple example of intertemporal production theory, then for macro. The market for capital goods is then explicitly introduced and the relation between the marginal efficiencies of investment and capital is shown both algebraically and diagrammatically. The factors influencing the slope of the investment function in relation to the slope of the marginal efficiency of capital function are spelt out. From the derivation the Keynesian investment function emerges not as a demand curve for investment goods, but as a market-equilibrium curve. It shows the relation between the rate of interest and the actual volume of investment in a period on the condition of equilibrium on the market for capital goods. It is also stressed that a given investment function is defined for only one period and shifts as a result of that period's investment activity.

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