Macro 2a Short run Long run (we might think its 5-10 years) Theoretical definitions prices flexible

ble but resources / technology fixed Level of Y real GDP Economys factors of productions (resources) Capital and labor Technology Technology to use workers and machines to produce output Aggregate production function Y=F(K,L) Often economists will assume Cobb Douglas production function Why use cobb douglas? Mathematical convenient and accurate representation realistic features of the cobb Douglas function: it has constant return to scale (if multiply both K, L by constant Z, then multiply Y by Z) Proof: suppose K rises from Ko to Z K0 and L rises from L0 to Z Lo. Y=A(Z K0) (Z L0) 1- Y = Z Y0 Decreasing marginal products of K, L = =

So in the long run, K and L are fixed

Division into types of income (real GDP) Y = total output = total income Types of income Labor income Labor income = wL

w = real wage r rental rate ofr capital Assume competitive labor market W = MPL

Labor income = w L= MPL L= Labor share of income = =

Capital income rK = capital share =

profits Y-wL-rK = profits =

Labors share of income [ fig3-5]

Cobb Douglas with

= 0.3

Division into types of expenditure

Very long run