The Concept of Economic Efficiency 35 



The indifference curve must have the kind of curvature shown 

 on our diagram. For as the consumer surrenders more of his 

 present income for the sake of future returns, he will feel the loss 

 more keenly, and as he adds more and more to the future income 

 he will find that further additions will be worth successively less 

 to him. Thus, the incentive to save must become increasingly 

 larger in order to induce the consumer to save larger amounts. 



Figure 8 shows the effects of an increase in the interest rate from 

 ii to ig. This permits the consumer to attain a higher set of com- 

 binations of present consumption and future interest receipts. He 

 will thus select a new equilibrium point d. It is generally assumed 

 that the new point will represent more saving.® 



With an interest rate of i^ our consumer will save YC; at a rate 

 of ia his saving will rise to YD. Similarly, we can derive the rate of 

 saving which corresponds to every interest rate. This enables us to 

 derive the supply curve of saving for this individual. The curve is 

 illustrated in Figure 9. Similar curves can be derived for all other 

 individuals, and added horizontally to derive an aggregate curve of 

 savings for the economy as a whole. 



On the other side of the market, the demand for capital in the 

 competitive model is governed by the profit motive. It is assumed 

 that each entrepreneur is aware of a set of investment oppor- 

 tunities. They may be of many varieties: development of new 

 products, new markets, new technological processes, etc. There is 

 only one common denominator among them. Each opportunity 

 holds the promise of producing an income stream in the future. 

 This stream may come from an increase of sales revenue larger 

 than the added operating costs, or it may result from reductions 

 in operating costs made possible by the investment. 



Suppose a perpetual investment of $1,000 will yield an income 

 stream of $130. Its rate of return, or as it is sometimes called, its 

 marginal efficiency of investment, would be 13 per cent. This 

 assumes that, if the investment is subject to deterioration with use 

 or to obsolescence, maintenance outlays and modernization expendi- 

 tures have been made to keep intact the value of the lender's 

 investment. Thus, the investment represents a commitment of a 

 bundle of economic resources. If the investment is successful, it 



'It is not inconceivable, however, that in the case of some individuals with a 

 specific future income goal in mind, the situation may be reversed. 



