The term used to describe all those instruments of production which are deliberately made by man to carry on production in the future

Efficiency of Capital

Efficiency of capital is defined as “the highest rate of profit over supply price of a capital asset”

According to the definition, efficiency of capital is determined by the ratio between annual profit and supply price of a capital asset.

Rate of Profit (Efficiency of Capital) =         Annual Profit

                                                             Supply Price

Factor influencing Efficiency of Capital

1.      Optimum combination of factors

If a capital asset is combined with other factors in a most suitable way, the productivity of the capital asset go up.

2.      Quality of raw material

If good quality of raw material is being processed through machines, better quality of products will be produced. This will result in greater profit and as a result efficiency rises.

3.      Mobility of capital

The efficiency of capital asset increases with its mobility.

4.      Invention and innovations

Inventions reduce the cost of output while innovations rise up the Supply for output. Both factors increase profit.

5.      Skilled Labour

Suitable qualified labourers to handle the work on machines will increase the efficiency of capital assets

6.      Changes in tax rates

If tax rates are reduced cost of production also reduced as a result profit goes up.

7.      Rapid growth of population.

High population rate increase the Supply of goods and services.