ECON 2H03 Lecture Notes - Lecture 11: Autarky, Disposable And Discretionary Income, Aggregate Demand
9 Oct 2016
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Document Summary
Diminishing marginal returns: constant returns to scale mpl is 15 partial derivative with respect to l, diminishing mpl = (kl)^-1/2 -- falls as l rises, diminishing -- mpl =15/2 l^-1/2 falls as l rises. Constant returns to scale does not automatically imply diminishing marginal returns. Firms hire labour to where mpl= w/p (real wage) Real wages adjust to equate labour demand with supply. Mpl = w/p the same goes to mpk = (real rental price) r/p mpk curve is the demand curve. Firms maximize profit by choosing k for mpk = r/p. Competitive, profit maximizing firms, then each factor of production is paid according to marginal product. Income remaining after firms have paid is economic profit. Total income is divided among return to labour, return to capital and econ0omic profit. Each factor of production is paid marginal product, then sum of these factor payments equals total output.
