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THE MARGINAL‐EFFICIENCY‐OF‐CAPITAL FUNCTION OF THE FIRM
Author(s) -
Barges Alexander
Publication year - 1987
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1987.tb00769.x
Subject(s) - function (biology) , capital (architecture) , economics , capital budgeting , investment (military) , capital investment , investment function , microeconomics , production function , neoclassical economics , mathematical economics , finance , production (economics) , political science , archaeology , evolutionary biology , project appraisal , biology , politics , law , history
In this paper, the author points out that over a decade ago E. Norman Bailey identified the marginal‐efficiency‐of‐capital (MEC) function as erroneous and argued that revisions in capital budgeting theory and teaching were necessary. The author develops more fully the arguments against the function and offers the theoretically correct MEC function. The development of the correct MEC function is a straightforward application of basic price theory; however, this application requires that the capital of the firm be viewed as a collection of complementary resources, in addition to its role as an income‐producing investment.