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Microeconomic fundamentals of the aggregate production function with constant returns to scale

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  • Piotr Pietraszewski

Abstract

In the paper the aggregation problem regarding production functions is considered. This issue is of fundamental importance for the mainstream of contemporary macroeconomics due to the common usage of the aggregate production function (APF) both in theoretical models and empirical research. The aim of the paper is theoretical reconstruction of microeconomic assumptions underlying the APF with constant returns to scale (linearly homogenous). The paper is mainly the critical review that systematises the results scattered in the literaturę and supplements them with the results of the author. Following the literature, the relationship between the concept of the APF and general equilibrium in the economy was explained. It was shown that consistent view of economic activity on the level of individual firms operating in perfectly competitive one-sector economy, which enables to construct the APF with constant returns to scale, is possible under the assumption that firms reaches the minimum of its U-shaped average cost curves, achieving zero subnormal profits. Generalizing considerations about the existence of the APF over multi-sector economy, new problems raised by the need to aggregate different products were considered.

Suggested Citation

  • Piotr Pietraszewski, 2016. "Microeconomic fundamentals of the aggregate production function with constant returns to scale," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 45.
    • Handle: RePEc:eko:ekoeko:45_135
    DOI: 10.17451/eko/45/2016/147
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    File URL: http://ekonomia.wne.uw.edu.pl/ekonomia/getFile/789
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