In an attempt to integrate thermodynamics with economics, production functions are proposed that depend on capital, labor, energy and technological parameters associated with the energy conversion efficiency of the capital stock. Based on these production functions, which resolve most of the unexplained Solow residual of conventional economic growth theory, we develop the optimization model PRISE of PRice-Induced Sectoral Evolution. The model is designed to analyze potential changes of inputs, outputs and profits in differently energy- and labor-intensive sectors of an economy in response to changing factor prices. The model has been tested by comparing its predictions with the German sectoral economic evolution, 1968-1989.
energy conversion, production functions, factor prices, economic evolution