Mobilization of Savings
The next step in the process of capital formation is that the saving of the households must be mobilized and transferred to businessmen or entrepreneurs who require them for investment In the capital market funds are supplied by the individual investors (who may buy securities or shares issued by companies), banks, investment’ trusts, insurance companies, finance corporations, government, etc. If the rate of capital formation is to be stepped up, the development of capital market is very necessary. A well – developed capital market will ensure that the savings of the society will be mobilized and transferred to the entrepreneurs or businessmen who require them.
Investment of Savings in Real Capital
For savings to result in capital formation, they must be invested. In order that the investment of savings should take place, there must be a good number of honest and -dynamic entrepreneurs in the country who are able to take risks and bear uncertainty of production.
Given that a country bad got a good number of venturesome entrepreneurs, investment will be made by them only if there is sufficient inducement to invest. Inducement to invest depends on the marginal efficiency of capital ti.e., the prospective rate of profit) on the one hand and the rate of interest on the other.
But of the two determinate of inducement to invest – the marginal efficiency of capital and the rate of -interest it is the former which is of greater importance. Marginal efficiency of capital depends- upon the cost or supply price of capital as well as the expectations of profits. Fluctuations in investment are mainly due to the changes in expectations regarding profits. But it is the size of the market which determines the scope for profitable investment. Thus, the primary factor which determines the level of investment or capital formation in an economy is the size of market for goods.