A closed economy, market-clearing model.
1. Supply side – factor markets (it the market for factor such as capital and labour. There is
supply and demand. The price is determined with supply meats demand.
- Determination of output/income.
2. Demand side – determinates of consumption, income, and government spending.
3. Equilibrium – goods market and loanable funds market.
Factors of Production
-
Capital = k (tools machines, and structures used in production).
Labor = L (the physical and mental efforts of workers).
The simple production function shows Y= F(K, L)
- Shows how much output (y) the economy can produce from K units of capital and L
units of labor.
- Reflects the economy’s level of technology.
- Exhibits constant returns to scale.
Returns to Scale: A review.
so many production function
has a property of diminishing marginal returns
- As a factor
The total national production is just exhausted as all factors were paid their mariginal products