March 2025

Definition of Labour Labour refers to human effort—both physical and mental—used in the production of goods and services. It is one of the four fundamental factors of production in economics, alongside land, capital, and entrepreneurship. Labour includes all types of work performed by people in exchange for wages, salaries, or other compensation. Key Characteristics of Labour Human Element: Labour is inseparable from the person who performs it—it cannot be bought or sold like a commodity.… Read more

What Is Labour? Labour refers to human effort—both physical and mental—used in the production of goods and services. It is one of the four primary factors of production, alongside land, capital, and entrepreneurship. Labour is a human resource, meaning its supply and productivity are influenced by education, skills, health, motivation, and demographics. Characteristics of Labour Perishable: Labour cannot be stored—unused labour today is lost forever. Heterogeneous: Each worker is different in terms of skills, experience, and productivity.… Read more

Understanding the Capital Market The capital market brings together savers (suppliers of capital) and investors (demanders of capital). The interest rate acts as the price of capital, balancing the demand and supply of funds. This market determines how financial resources are allocated across the economy. The Demand for Capital Who Demands Capital? Businesses: To invest in equipment, technology, R&D, and expansion. Governments: To finance infrastructure, education, and defense through bond issuance.… Read more

Understanding Capital Market Imperfections A perfect capital market assumes equal access to funds, perfect information, and rational behavior by all agents. In reality, imperfections exist that prevent the optimal allocation of capital across individuals, firms, and sectors. These imperfections distort investment decisions, raise the cost of capital, and reduce economic efficiency. Key Sources of Market Imperfections 1. Asymmetric Information Occurs when borrowers know more about their risk profiles than lenders. Leads to: Adverse Selection: Riskier borrowers are more likely to seek loans, raising the average risk in the market.… Read more

What Is the Supply of Capital? The supply of capital refers to the total amount of financial resources available for investment in physical and human capital. It includes funds provided by households, businesses, governments, and foreign entities for the purpose of generating future returns. The supply of capital is a crucial input in determining investment levels, interest rates, and economic growth. Main Sources of Capital Supply Household Savings: Individuals deposit savings into banks, purchase bonds, or invest in equities, making funds available for business and government use.… Read more

Definition of Marginal Efficiency of Capital (MEC) The Marginal Efficiency of Capital (MEC) refers to the expected rate of return on an additional unit of capital. It is a concept introduced by John Maynard Keynes to assess the profitability of investment projects. MEC is compared against the prevailing interest rate to determine whether an investment is worthwhile. Formula and Explanation MEC is the discount rate that equates the present value of expected future returns from a capital asset to its cost.… Read more

Foundational Role in Financial Architecture Capital and interest serve as the structural bedrock of financial systems worldwide. They facilitate the flow of funds from savers to borrowers, underpin investment activity, and influence macroeconomic stability. The effective functioning of financial institutions—banks, investment firms, insurance companies—depends on the mobilization of capital and the pricing mechanism of interest. Capital as a Financial Resource Capital fuels economic development by financing business formation, infrastructure, innovation, and long-term growth.… Read more

Capital as a Strategic Resource in Business Capital is required to fund operations, acquire assets, expand production, and invest in innovation. Business leaders must allocate capital efficiently to projects that maximize returns. Capital can come from equity (owners/shareholders) or debt (loans, bonds). Interest as the Cost of Capital When businesses borrow funds, interest is the cost paid to lenders. Interest rates directly influence borrowing decisions—higher rates discourage borrowing and expansion, while lower rates promote it.… Read more

What Is Capital Accumulation? Capital accumulation refers to the process of increasing the stock of capital goods—such as tools, machines, factories, and infrastructure—within an economy. It occurs through saving and investing in productive assets rather than consuming all available resources. This accumulation is essential for expanding productive capacity and improving standards of living over time. Mechanisms of Capital Accumulation Household and Business Saving: Deferred consumption enables resources to be redirected toward investment.… Read more