o All firms are equally efficient, and have constant returns to scale (double input = double output)
o Firms will use labour and capital to produce one distinct consumption good
o All wages and profits are measured in real terms (denominated in terms of consumption good).
o Profits of firms are distributed to consumers as dividends in real terms
o Production function: Y = zf(K, N)
K: Units of capital
N: Units of labour
z: Total factor productivity
When changed, affects both output and productivity of the inputs.
Ex. Technology, managerial skills, climate
Marginal product: Increase in output that results from a one unit change in input
o Derivative of the produc