Marginal efficiency of capital

The marginal efficiency of capital is a fancy term that basically means how much extra money you can expect to make if you invest in something.

Imagine you are a kid with a piggy bank. You have a certain amount of allowance money saved up and you want to decide how to spend it. You could put your money in a piggy bank with a low interest rate or you could invest in a Lego set that you think will be really cool and you can sell for more money later.

The Lego set is like a capital investment for a grown-up. When a company or a person decides to invest in something, they want to know how much more money they can make from that investment. The marginal efficiency of capital is a way to measure that.

Let's say you buy the Lego set for $10 and after a few months, you sell it for $15. That extra $5 you made is the marginal efficiency of capital for that investment.

Similarly, when a company invests in a new project or buys new equipment, they want to know how much extra money they can expect to make. The marginal efficiency of capital helps them make that decision.

So, the next time you are deciding whether to spend your allowance on a piggy bank or a cool toy, remember to think about the marginal efficiency of capital!