Class Slides for EC 204 Spring 2006. To Accompany Chapter 3. The Production Function. Assume Constant Returns to Scale:. Full Employment Determines the Supply of Output:. The Firm’s Demand for Factors. Firms Maximize: Profits = Revenue - Labor Costs - Capital Costs
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
To Accompany Chapter 3
Assume Constant Returns to Scale:
Full Employment Determines the Supply of Output:
Profits = Revenue - Labor Costs - Capital Costs
= PY - WL - RK
= PF(K, L) - WL - RK
Factor Demands are determined by:
MPL(K, L) = W/P
MPK(K, L) = R/P
Real Economic Profit = Y - (MPL x L) - (MPK x K)
Y = (MPL x L) + (MPK x K) + Real Economic Profit
Euler’s Theorem: Constant Returns to Scale implies:
F(K, L) = (MPK x K) + (MPL x L)
If factors of production are paid their marginal products, then
these factor payments sum to total output. Thus, CRS, profit
maximization, and competition imply that Economic Profit = 0.
Since owners of firms usually own the capital, their “profit”
is the payment to capital, rK.