03+Aggregate+Production+and+Productivity

Equals the slope of this production function 2 is

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Unformatted text preview: K = Y/K 1. Equals the slope of this production function. 2. Is always positive. 3. Declines as the amount of capital increases. K 3-9 3-10 low income countries have very little capital The Production Function: Output & Capital • The Production Function: Output & Capital MPK Two properties of this production function: 1. Exhibits increasing returns to capital. • Slopes upward because more K produces more Y. 2. Exhibits diminishing marginal product of capital. • Slope becomes flatter because each additional increment of K eventually produces smaller increments of Y. MPK K 3-11 economic profit continues to grow, but at some point, it starts to slow down as capital increases, the marginal product of k decreases 3-12 MPK is also the demand for capital 3 Determination of Capital Returns, rc Determination of Capital Returns, rc • Now, in equilibrium, the real cost of capital, rc, will equal the marginal product of capital, i.e., K.supply rc, MPK B rc = MPK – So the MPK is also the demand for capital, KD. A • Suppose the supply of capital, KS, is fixed, i.e., K0=MPK KS = K K 3-13 3-14 the rental cost of capital is determined by the value of the equipment point A is EQB as the rental cost rises the demand for capital till decrease. so you have an excess amount of capital so then the price falls The Production Function: Output & Capital • If either L0 or A0 changes, what happens to: The Production Function: Output & Capital Y 1. The production function, B rc, MPK AY = A F(K, L ) Y0 0 0 2. Economic output, 3. The marginal product of capital, and 4. The real (rental) cost of capital? rc0 K 3-15 K MPK K K 3-16 L goes up => Y goes up => rotate production function up. meaning the slope of the production function should be steeper at point B than at pt A rental rate goes up also, since the MPK shifts up everything increases 4 The Production Function: Output & Capital The Production Function: Output & Labor • • Factors that shift the demand for ca...
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This note was uploaded on 11/07/2012 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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