II._A._B.__Long_Run_-_Production_Income_

II._A._B.__Long_Run_-_Production_Income_ - Intermediate...

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Intermediate Macroeconomics EC 302 II. Economy in the Long Run A. Supply of Goods and Services: Production Factors of Production The Production Function Labor Market B. Distribution of Income Factor Markets C. Demand for Goods and Services: Expenditure Consumption, Investment Government Purchases Net Exports (Net Exports = 0 for the closed economy) D. Goods Market Equilibrium 1 EC302 FS08 Outline II. A.B.
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A. Supply of Goods and Services: Production Factors of Production Capital = K Labor = N Other Productivity: Production Function : How much output, Y, can be produced from K units of capital and N units of labor? The function reflects the current technology. Y = A F (K, N) Cobb-Douglas Production Function Y = A F (K, L) = A K α N 1 ; where α is capital’s share of input and 1- α is labor’s share of input. Cobb-Douglas Production Function “fits” the US economy pretty well: Y = A F (K, N) = A K 0.3 N 0.7 1. Features: a. Both inputs are necessary for production b. Diminishing marginal product of factors c. Constant returns to scale a. Both inputs necessary:
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This note was uploaded on 02/22/2010 for the course EC EC 302 taught by Professor Wilson during the Fall '08 term at Michigan State University.

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II._A._B.__Long_Run_-_Production_Income_ - Intermediate...

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