Class slides for ec 204 spring 2006
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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

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Class Slides for EC 204 Spring 2006

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Class slides for ec 204 spring 2006

Class Slides for EC 204Spring 2006

To Accompany Chapter 3


The production function

The Production Function

Assume Constant Returns to Scale:

Full Employment Determines the Supply of Output:


The firm s demand for factors

The Firm’s Demand for Factors

Firms Maximize:

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


The division of national income

The Division of National Income

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.


Demand for goods and services

Demand for Goods and Services


Equilibrium in goods market

Equilibrium in Goods Market


Equilibrium in financial markets

Equilibrium in Financial Markets


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