1 / 22

Class Slides for EC 204 Spring 2006

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

laksha
Download Presentation

Class Slides for EC 204 Spring 2006

An Image/Link below is provided (as is) to download presentation 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. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Class Slides for EC 204Spring 2006 To Accompany Chapter 3

  2. The Production Function Assume Constant Returns to Scale: Full Employment Determines the Supply of Output:

  3. 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

  4. 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.

  5. Demand for Goods and Services

  6. Equilibrium in Goods Market

  7. Equilibrium in Financial Markets

More Related