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EON 314 Lecture 1 - The Solow Model.docx

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Economics (Arts)
ECON 314
Eesha Sen Choudhury

The Solow Model - Neoclassic model  Neoclassical tradition opposite to classical tradition (supply creates demand) to Keynesian (Harold Domar Model - i.e. demand creates supply - created during depression when he saw people had things but weren't buying)  Assumptions o Labor and capital are the two factors of production  Land also as factor of production - we are working with firms they don't use land o The level of technology is exogenously given - throughout the model the technology stays the same o There are constant returns to scale - if factors of production increase by x then output will also increase by x percent  Returns to scale vs. returns to a factor (returns or output response in a change in one factor) o The production is function is Cobb Douglas function [ Y=K^alpha L^beta]  Constant returns to scale is saying if labour and capital is doubled then output will double also an have Y=K^alpha L^ 1-alpha **use this** y=k^alpha production function for a single individual - multiply this by L times to represent economy y= Y/L and k=K/L  when we produce together and produce ore then we have increasing returns to scale.  A is technology which is exogenously given so A is 1 - we can write it or we can't it won't change  Diminishing returns to capital per capita (or a factor) - the shape of the production function is the curve - positively sloped, starts almost vertical then flattens out, increases at a decreasing rate o When we have diminishing returns to capital we keep labour constant  In economics we look for an equilibrium - we need a production function to curve inwards to curve inward towards other curves - we can’t have increasing returns to capital  f(k) is y is output curve is production function  You produce with what ever y
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