- A competitive output market so that the equilibrium price of output (p): p = Average cost (0 profits due to entry and exit) = Marginal cost (necessary for profit maximization) - Output demand: YD=D(p) with price elasticity of output demand D=(∂YD/∂p)(p/YD) = D’∙(p/YD) - In equilibrium: Supply = Demand F(K,L) = D(P) (7) Firms are maximizing profits so: p FL=w (8) p FK= r (9) - Say that w changes. How does this affect (7), (8) and (9)? (differentiate them WRT w) (7’) ) = 1 (8’) (9’) rewrite (mult. through by p and use (8) and (9)): (7’) (7’’) as (use 2a to eliminate FLL and replace FLK): rewrite (8’) ) (8’’) this uses (2a): FLL = - FLK and = rewrite as (uses (2b) to replace FKK and definition of ): (9’) (9’’)
- A competitive output market so that the equilibrium price of output (p): p = Average cost (0 profits due to entry and exit) = Marginal cost (necessary for profit maximization) - Output demand: YD=D(p) with price elasticity of output demand D=(∂YD/∂p)(p/YD) = D’∙(p/YD) - In equilibrium: Supply = Demand F(K,L) = D(P) (7) Firms are maximizing profits so: p FL=w (8) p FK= r (9) - Say that w changes. How does this affect (7), (8) and (9)? (differentiate them WRT w) (7’) ) = 1 (8’) (9’) rewrite (7’) (mult. through by p and use (8) and (9)): (7’’) rewrite (8’) as (use 2a to eliminate FLL and replace FLK): ) (8’’) this uses (2a): FLL = - FLK and = rewrite (9’) as (uses (2b) to replace FKK and definition of ): (9’’)
GLAB14d.docx