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The Production Function

Building  Blocks

The Neoclassical Production Function

Production is given by Y = f(K,N), where K is capital and N is labor.

Fixed Capital in the Short Run

In the short run, capital is fixed and Y = f(K,N), where K is fixed in the short run.

Technology Shocks

Could be thought of as shocks to K.

How does this differ from the average cost / marginal cost diagram?

The common theory of the firm treatment focuses on the profit maximizing condition P = MC (price equals marginal cost).  The marginal cost is MC = W/MPN or the wage rate divided by the marginal number of units.   So, we have P = MC = W/MPN, which implies MPN = W/P.  The two approaches are different views of the same result.  The critical point is that we are maximizing profits with only one variable factor of production.  Picking the optimal level of that factor of production yields the same outcome as picking the optimal level of production.

References:

Production Function, Wikipedia.


Link:  Contents  Demand for Labor

Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke