ECON 2450 Lecture Notes - Graph Labeling, Product Rule, Production Function
10 Apr 2013
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Document Summary
Environment: production function: describes how, given the level of technology (et), the economy"s pro- ductive resources, capital (kt) and labor (lt) are used to produce output, (0. 1) We assume that the production function has the following properties: (a) it exhibits constant returns to scale (if you double inputs, you double output), (b) it is increasing in capital (mp k > 0), (c) exhibits diminishing returns to capital (as capital increases mpk falls). Yt = f (kt, etlt: savings/investment: consumers are assumed to consume a constant fraction, s < 1, of their income (real gdp). Therefore total investment in this economy is: law of motion for capital: a constant fraction < 1 of the capital stock depreciates each period. The total capital stock next period is then, It = syt (0. 2: labor force: the labor force is assumed to grow at a constant proportional rate n per period. Kt+1 = kt + it kt (0. 3)
