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