ECON-2006EG Study Guide - Quiz Guide: Diminishing Returns, Production Function, Marginal Product

45 views4 pages

Document Summary

The solow (neoclassical) growth model solow realized problems with harrod-domar model. Drop fixed-coefficient production function and replace it with neoclassical production function. Allows more flexibility between production functions the capital-output ratio & capital-labor ratios no longer fixed. It is depending on the endowments of capital & labor in economy/ production process. Developed to analyze industrialized economies & to explore economic growth in all countries. The model: isoquants underlie the neoclassical production function are curved (not l-shaped anymore) Output can be expand in 3 ways: expand at constant factor proportions ( identical to fixed proportions) if proportionally the capital-output ratio stays constant. Solow model assumes constant return on scale. Production function has the property of diminishing returns to capital! With fixed labor supply and given amount of machinery result in large gains of output. Adding more & more machinery additional gain from more machines gets smaller and smaller. The slope of the production function declines as capital stock increases!