Chapter 3

Chapter 3 - Kimberly Zhang Chapter 3 GDP depends on factors...

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Kimberly Zhang Chapter 3 GDP depends on factors of production and ability to turn inputs into outputs o Factors of production: inputs used to produce goods and services Most important are capital and labor Assume fixed amounts of capital and labor (and also fixed output) Production function: available technology o Y = F(K, L) o Constant returns to scale: zY = F(zK, zL) Economy’s aggregate income equals aggregate output Factor prices: amounts paid to the factors of production—wages earned by workers and the rent of the owners of capital collect o Determines distribution of national income o Factor supply curve is vertical since factors of production are fixed o Downward sloping factor demand curve Assumption that a typical firm is competitive o Goal is always profit maximization o Profit = Revenue – Labor Costs – Capital Costs = PY – WL – RK = PF(K, L) – WL – RK MPL: extra amount of output firm gets from one extra unit of labor o MPL = F(K, L+1) – F(K, L) o Diminishing marginal product: holding the amount of capital fixed, MPL decreases as the amount of labor increases
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MPL becomes the slope of the production function; production becomes flatter o Extra revenue a firm gets from an extra unit of capital equals the marginal product of capital
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Chapter 3 - Kimberly Zhang Chapter 3 GDP depends on factors...

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