Marginal efficiency of capital is defined as the rate of discount applied to annuities so that the current value of the capital asset and the returns expected from it during the life time of its service equals its supply price.

Following are the factors which can influence the rate of MEC in an economy.

Change in the Wage Rate
An increase in the wage rate results in the cost of production going up due to which the annuities will fall and hence the discount rate or MEC will have to be lowered so as to equate the supply price with the discounted annuities. Thus, MEC falls. Conversely, when the wage falls, cost of production also falls and thus the prospective annual yields, or annuities, go up and MEC also rises.

Inventions and Innovations
Whenever there are inventions and / or innovations introduced by a firm, the MEC would be very high in the beginning due to non-availability of such technology in other firms. With the passage of time when such technology becomes available in other firms it results in a gradual fall in the MEC due to an increase in the output level.

Capital Accumulation
Capital accumulation means the addition of capital goods to the existing stock of capital assets in a country. When capital accumulation takes place in an industries the output supply of that industry increases in the market due to which price, of the product produced falls and with it the rate of profitability or MEC also falls. This is why Keynes says that there is always a regular decline in the MEC in a laissez-faire economy in the long-run.

Boom and Depression
Boom is the rise of economic activities in a country above the normal situation while a depression is just the opposite of it. During the boom period the general price level has a tendency to go up because the people are optimistic about future business and as a result the MEC rises and the investment level also increases. For the depression period, the situation would be just the opposite.

Change in the Rate of Taxes
An increase in the tax rate results in the cost of production to go up due to which the profit per unit of product fall or MEC becomes low. Conversely, when the tax is reduced the cost of production goes down which results in the profit prospects to increase and hence the MEC rises.

Growth of Population
An increase in population results in an increase in the demand for commodities due to which prices rise and as a result the MEC rises. If the population is merely stationary this would result in the MEC to remain constant or it may very well fall as well.

Territorial Expansion
As a result of territorial expansion, demand for commodities and services in the new territory would go up. For the country that has control over the new territory, it would lead to an increase in the country’s MEC; on the other hand, the country losing the territory would experience a fall in its MEC.