CHAPTER 5

Capital and Labor

An important issue that arises in macroeconomics has to do with how the economy performs, given that it is in a classical state of full employment. Recall Alan Blinder’s comment, noted in Chapter 1, about utilizing “inputs more efficiently.” This is called the efficiency or allocative problem in economics and is a problem that economic agents solve in the classical model. The efficiency problem can be seen as one aspect of the overall coordination problem.

In this chapter, we will see how individual economic agents solve this problem as it relates to capital and labor. In the preceding chapter, we considered in detail how economic agents solve the problem of how much to save and therefore how much financial capital ...

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