ECN 101 Lecture Notes - Lecture 12: Production Function, Marginal Revenue Productivity Theory Of Wages, Opportunity Cost
Document Summary
Difficulty of measuring productivity improvements in service industries. Costs of growth: the savings that is necessary to allow for capital accumulation. Production function refers to a systematic relationship between input and output. How much output can be produced from a give quantity of primary factors depends on the secondary factors. For example, state of technology, quality of labour force in terms of human capital. Real rate of interest determines the quantity of capital a firm will use. Real rate of interest reflects the opportunity cost of capital, as it measures the additional amount the firm will need to repay if it borrows to finance investment expenditure in new capital. It shows the interest income foregone from investing in the new capital rather than purchasing an interest-bearing security. Benefit is extra revenue for the firm that an additional unit of capital will provide (mrpk) Optimal stock of capital = marginal revenue product of capital mrpk (benefit) real rate of interest (cost)
