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Chapter6 - Chapter 6 Firms Labor Demand Investment Demand...

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© Sanjay K. Chugh 75 Spring 2008 Chapter 6 Firms: Labor Demand, Investment Demand, and Aggregate Supply We have studied in depth the consumers’ side of the macroeconomy. We now turn to a study of the firms’ side of the macroeconomy. Continuing with our representative agent paradigm, we suppose there is a single “representative firm” in the economy. This firm must use labor and capital (machines) in order to produce the output good (“all stuff”) that consumers demand. Condensing all of the inputs that a firm uses into the two categories “labor” and “capital” is a useful simplification. 35 In studying firms, we again adopt the two-period idea from the consumption-savings model. f(n,k) n f(n,k) k Figure 24. The production function f(k, n) displays diminishing marginal returns to both labor and capital. The left panel shows that as capital is held constant, increases in labor increase output at an ever-decreasing rate. The right panel shows that as labor is held constant, increases in capital increase output at an ever- decreasing rate. 35 Indeed, if you think about it, there really is only one thing that is not readily categorized as either labor or capital – land. Thus, we abstract from land.
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