The Concept of Economic Efficiency 



37 



C D 



FIGURE 9. The Supply Curve of Savings 



Savings 



rate of return greater than what it must pay for the use of capital. 

 Thus, the level of investment of each enterprise is determined, 

 given a rate of interest. 



There will be instances when decisions will be made on alterna- 

 tive investment opportunities. For example, construction of a new 

 plant may preclude modernization of an old one. The rate of 

 return on the new plant may be lower, but the investment is much 

 larger, and so the total return may be greater. Whether the new 

 plant is the preferred investment will depend on the interest rate. 

 If the rate is sufficiently low, the total return above borrowing 

 costs may justify the larger investment. 



Interdependence among investment opportunities within the 

 enterprise complicates the decision-making process, insofar as 

 projects cannot be considered as alternatives but only in reason- 

 able combinations. This consideration does not affect the essential 

 principle, however. Each enterprise, to maximize profits, will 

 invest in the set of possibilities which yields the highest total 



