A model of production Flashcards
4.2 Jones
What does the simplified economic model with ice cream production represent?
It represents a closed economy where ice cream is the only consumption good, used to demonstrate how labor (L) and capital (machines, K) interact to produce goods
The Production Function
what is F (K , L)
a generic function describing how inputs yield output
To calculate how much Y from K and L, we use:
Cobb-Douglas production function
Cobb-Douglas production function
Generic Cobb-Douglas production function:
Returns to Scale
Marginal Benefit of Hiring a Worker → additional revenue
Marginal Cost of Hiring a Worker →
wage
Marginal Cost = Marginal Benefit for Labor:
Marginal Cost = Marginal Benefit for Capital:
where r is the price of capital
Producer’s Profit =
Given p, r , and w , the producer chooses K and L to maximize its profit:
Supply and Demand in the Capital and Labor Markets
the main 5 equations