ECON302 Lecture Notes - Lecture 9: Production Function, Business Cycle, Employment-To-Population Ratio
20 Dec 2015
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Document Summary
We extend our equilibrium business cycle model by allowing capital and labour to vary when economic conditions change in a country. The flow of capital services is a constant multiple of stock of capital stock. Introduce a new variable for our basic model: In reality, capital utilization rate is never 100% due to the depreciation. The production function is augmented to incorporate flow of capital services: The firm will choose the level of kd that maximizes profit: Additional output for one more hour of machine use. The owner of capital services selects a particular (capital utilization rate) , that maximizes their net return from supplying the capital services. Net return (real income) from supplying the flow of capital services: Rate of return on capital capital stock (r/p) k- ( ) In a recession, you will use your machines less intensively since you"ll get fewer orders. In an expansion, you will use your machines more intensively since you"ll get more orders.
