marginal efficiency of capital
marginal efficiency of capital (MEC)The highest interest rate at which a project could be expected to break even. This depends on the immediate profits expected from operating the project, and the rate at which these are expected to decline through reductions in the real price of the output, or increases in real wages and fuel and materials costs. If all possible projects in an economy are arranged in descending order of their MEC, theory suggests that investors will proceed with those with MEC higher than the interest rate plus an appropriate risk premium, and reject those whose MEC is lower than this. The MEC is contrasted with the marginal product of capital, which is concerned only with the immediate effect of additional capital on possible output, and not with how long the resulting profits can be expected to persist.
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