Marginal Efficiency of Capital and Business Expectation

MEC (Marginal Efficiency of Capital) depends on the businessmen’s expectations, which increases due to invention and goes down due to any threat to the returns on investment. It is also affected by the annual spirit of the entrepreneur. That is why investments are not always calculations but also irrational optimism. Business expectations are based on existing events and partly future facts. The investment decision is not done on actual investment but on the future yields.

Therefore, huge expenditure is required but actual returns start later. These two types of expectations – short term and long term are based on existing facts, whereas long term expectation is based on the future events.

Acceleration Principle:

The multiplier and Acceleration Principle are parallel concepts. This principle is also called Principle of Acceleration.

Multiplier shows the effect of consumption on investment.

Acceleration shows the effect of investment on consumption.

This is so because to produce the final goods, capital goods are also required. Therefore, if you want to increase the final product, the capital goods which are inputs for these final goods should also be increased. When consumption increases, the demand for factors of production will also increase.

There are certain practical limitations to this principle.

No excess capacity: If consumer goods sectors have excess capacity, induced investment will not increase. Only after the utilization of idle capacity, the principle will start operating.

Surplus capacity: Acceleration principle works on a very tough condition that there will be excess capacity in investment industry but not in the industry producing consumer goods. It is assumed that there is surplus capacity in investment goods industry, but if there is no excess capacity in machine making industries there will be postponed delivery and the acceleration will be low.

Availability of resources: When demand increase for capital goods that means increase in production, which again means more employment. So, there should be enough unemployed resources available. But only when the full employment level reached there is difficulty in expanding the production.

Nature of Demand: The demand for consumption goods should be more or less permanent for acceleration principle to work, because if the demand increase is temporary, then that will increase demand for capital goods as these goods are expensive.

The relationship between consumption, profit maximization and investment is shown by acceleration principle.

An Evaluation of Loss and Benefit Due to Tax in Property Market

We can evaluate loss and benefit from the economic policies by the government. Now we will discuss the gain and loss in consumer surplus due to tax and subsidies. We can understand the loss in consumer surplus by imposing the indirect tax with an example. Indirect tax is the tax that we pay when we are paying the price for a commodity. Suppose the supply is perfectly elastic for scooters, the demand curve for scooter is downward sloping.

Evaluating the loss and benefit due to tax

In the above figure, the number of scooters sold shown on X-axis and the price of scooters is shown on Y-axis. OP is the price and OQ is the number of scooters sold. The consumer surplus price OP is DCP. Now, if indirect tax is imposed on scooter, the price will increase to OP1 and the number of scooter sold decreases to OQ1. Thus the consumer surplus will decrease to DP1A. There is a decrease in consumer surplus by P1ACP. There are two parts in this is a decrease in Consumer Surplus P1ACP.

P1ABP – This decrease in consumer surplus is because of increase in price.

ABC – This decrease in consumer surplus is because of decrease in the number of scooters sold.

ABC is the extra burden due to the sales tax. P1ABP is the loss in consumer surplus which goes to the government as revenue. But ABC is excess burden or net loss in welfare, which is called Dead weight loss. This part of loss in welfare goes nowhere. Indirect tax distorts the price of scooter and decrease the demand for scooter. So the burden of indirect tax is more than direct tax.

Direct tax is superior to indirect tax because if the government takes away P1ACP by direct tax then the loss equal to ABC would not be born by the public. This evolution is followed in property market also.

A Discussion on Perfect and Pure Competition of Market

Perfect Competition can be categorized as:

Large number of buyers and sellers:

A market runs on large number of buyers and sellers. Single firm is not able to affect the market supply or the market price. Similarly, there are large numbers of buyers also in market. Even the buyers can’t influence the price by changing their demand because each buyer and seller is like a drop in the ocean.

Homogeneous product:

Homogeneous product is known as the most important feature. According to it, product, which these large number of buyers buy from large number of sellers are identical or we can say perfect substitute. That means if one buyer increase the price, the buyer will buy it from other sellers as the products are identical e.g. rice.

Free entry and exit of firms:

We can take an example to clarify the term. An entrepreneur, who has enough capital and still can start the business and enter the industry and any one who is incurring loss can stop the production and exit the industry.

Firms are price takers:

If there are many buyers and sellers, nobody can influence the price or the supply in the industry. They are just like the drop in the ocean.

No cost of transportation:

In the perfect competition it is assumed that cost of transportation does not exist.

Now we should talk about perfect and pure competition. Perfect competition has all the features of pure competition and some more features. The first three features given under perfect competition constitutes pure competition whereas perfect competition has the features of pure competition and two more features they are perfect knowledge about the market and perfect mobility of inputs and output. Market of competition comes through profit maximization concept.

Property market also runs on the same concept of perfect and pure competition in the modern market. Now, market is not a place where we sell or buy a thing. Now, market is services also where third party takes an entry such as – finance market, property market etc.

Concept of Market Equilibrium Theory in Market Demand

Market equilibrium is able to show interaction between the demand and supply. “Equilibrium” is Latin word, which means equal balance. It means there is no tendency to move.

Equilibrium of demand and supply:

Take here interaction between demand and supply. Demand and supply are always depended on price for commodities. Equilibrium price is the match of price of quantity demand and quantity supply. Equilibrium quantity is buying and selling products on equilibrium price. Here is a diagram to represent market equilibrium:

Equilibrium of Demand and Supply

Equilibrium Price:

There is a graph to show equilibrium price of market. Here, supply is P2 S2. There is excess demand of S2 D2. Due to competition in buyers, the price increases and reaches OP.

Equilibrium Price

Market equilibrium:

If there are no changes in demand or supply then equilibrium will go on so long. At first, we should take the change in the demand curve and assume that the supply curve remains shame. For example – if the shift in demand curve is due to change in income.

Market Equilibrium (Shift in demand curve)

Let’s take a view of shift in the supply curve also and assume that the demand curve remains constant.

Market Equilibrium (Shift in supply curve)

At last, in the market equilibrium, everyone who wants to sell, finds a buyer and everyone who wants to buy, gets a seller. This happen when, the market reaches equilibrium when the buyer finds a willing seller and seller finds a willing buyer. This tendency of market to reach equilibrium is not just theoretical, but we can see things happening in our day to day life.