- 62 Views
- Uploaded on
- Presentation posted in: General

Class Slides for EC 204 Spring 2006

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.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Class Slides for EC 204Spring 2006

To Accompany Chapter 3

The Production Function

Assume Constant Returns to Scale:

Full Employment Determines the Supply of Output:

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

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.