There are a number of factors that influence MEC. For the sake of simplicity, they are grouped as short-run and long-run factors. We discuss them briefly here:
(а) Short-run Factors:
The short-run factors that influence MEC are:
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1. Expected Demand:
MEC depends on the market demand of the product. When demand is high, MEC is high and when demand is low, MEC is low.
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2. Cost and Price Expectations:
If costs are expected to decline and prices to go up in future, the expectations of the entrepreneurs about the rate of return from investment will go up. In the opposite case, these expectations go down. MEC, in each case, would get affected significantly.
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3. Propensity to Consume:
A rise in the propensity to consume raises consumption demand and hence the total demand. This raises the value of MEC.
4. Change in Income:
An increase in income stimulates investment and a decrease discourages it.
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5. Current Expectation:
The rate of return on current investment influences the future investment and hence MEC.
6. Business Expectations:
The state of optimism or that of pessimism, influences investment and hence MEC.
(b) Long-run Factors:
Following are the long-run factors that influence the value of MEC:
1. Growth rate of population:
The rate of growth of population, if experiencing an uptrend, product demand is expected to go up with it and so is the MEC. The opposite is the effect of an anticipated fall in population growth.
2. Development of new areas:
In case an economy is planning economic development of new areas or that of the underdeveloped ones, all of the activities such as income, investment, production, consumption, etc., will go up, raising MEC in the process.
3. Technological Progress:
An improvement in the technique of production or, development of a better technology also helps MEC to go up.
4. The current level of utilization of the productive capacity:
If the productive capacity is currently underutilized, the long-run tendency would be its full utilization. This would necessitate investment which in turn would influence MEC.
5. Level of current investment:
If the level of investment is already high in an industry, there is little scope for further investment. In like manner, if the level of investment is currently low, there is a bright chance of it to go up in future. In either case MEC is likely to change depending on the current level of investment.
MEC is thus influenced by a number of factors. It is therefore possible to influence it appropriately to get rid of the undesirable effects of trade. Apart from the above, short and long-term expectation of the investors also influence MEC by influencing the prospective yields. Paragraph below explains the point.