Saving and Breakeven Investment

in the LR
The Supply of Goods
Begin with production function
Y = F(K, L) with Y=Output, L=Labor, K=Capital
Assume Constant Returns to Scale, CRS
zY = F(zK, zL) for z a constant
Transform production function into per capita terms.
y = Y/L = F(K/L, 1) = f(k)
y = Output per worker, k = Capital per worker
Define Marginal Product of Capital, MPK, as:
MPK = f(k+1) - f(k)
assume f(k) exhibits diminishing marginal returns.

2
Output and Capital per worker
Output
per Worker
Y = Y/L
f(k)

Capital per Worker k = K/L

3
The Demand for Goods
Simplify economy so that demand = C + I.
Cast this in per capita terms as:
y = c + i, where c = consumption per worker, etc.
assume simple form for consumption behavior:
c = (1-s)y where s is the savings rate.
Can write total expenditure using this behavior as:
y = c + i = (1-s)y + i
re-arrange this expression to yield:
i = sy = sf(k)
investment per worker equals savings per worker.

4
Output, Investment & Saving
Output
per Worker
y
f(k)

c Consumption per Worker

sf(k)

i Investment per Worker

Capital per Worker k

5
Changes in Capital Stock
Two forces act to change the capital stock
Investment (=Savings) increases Capital stock.
from before: i = sy = sf(k).
Depreciation (Breakeven Investment) reduces capital (it wears out).
assume certain percent wears out annually
call d the depn rate, so Total Depreciation = d x k
Change in Capital stock per worker is:
Change in k = Investment - Depreciation

k i dk sf(k) d k
6
Depreciation
Depreciation/L
dk

BI = d k = Depreciation/L

BI = Breakeven Investment

Capital per Worker k = K/L