Capital has five characteristics.

- It is productive.
- It is produced (investment requires opportunity cost of more consumption today)
- Its use is limited (rivalry)
- It can earn a return.
- It wears out (depreciates).

## Production function

### Assumptions -

- constant returns to scale (i.e. F(zK,zL)=zF(K,L)
- diminishing marginal product (where MPK=f(k+1)-f(k)

### Equation

Cobb-Douglas production function where

- F(K,L)=AK^αL^(1-α)
- y=Ak^α
- in the data α = 1/3
- MPK=αAK^(α-1)L^(1-α)