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Macroeconomics 2315 > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

What is the production function?

A

Y = A X F(K, N)
Productivity = A
Amount of labour = N
Amount of capital = K

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2
Q

What is the production function?

A

Slopes upwards
Slop flattens as input rises - diminishing marginal product as input increases

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3
Q

How does the production function relate output and capital?

A

Marginal product of capital, MPK = change in Y/ change in K

  • MPK is always positive
  • Diminishing marginal productivity of capital
  • MPK declines as K rises
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4
Q

What is the marginal product of labor?

A

Equal to the slope of production function graph
- MPN is positive
- Diminishing marginal productivity of labor

Demand for labor and investment funds are the same as their marginal productivity factors

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5
Q

What is the graph for the determination of labor demand?

A

Downwards sloping with real wage on the y axis and labor on the x axis
MPN and labor demand (ND) downwards curve and horizontal line - real wage

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6
Q

What is a supply shock?

A

Productivity shock
Change in an economy’s production function
Affects the amount of output that can be produced for a given amount of inputs
+ or -
Such as weather, oil prices, regulations, etc.

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7
Q

How is a negative supply shock shown on the graph of production as a function of labor?

A

Y on y axis and N on x axis
Upwards C curve moves down

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8
Q

What are the effects on parameters of the production function?

A

If A in Y = A x F(K,N) decreases then there are negative shocks

If A in Y = A x F(K,N) increases then there are positives shocks

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9
Q

What are the assumptions behind the MPN relationship?

A

Hold capital stock fixed - short-run analysis
Workers are alike
Labor market in competitive
Firms maximize profits

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10
Q

What is the marginal product of labor and labor demand?

A

Nominal and real wages
MRPN = P x MPN
MRPN = nominal marginal product of labor
P = price level
MPN = real marginal product of labor
W = MRPN is the same condition as w = MPN, since W = p x w and MRPN = P x MPN

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11
Q

How is the demand and supply curves in the labor market predicted?

A

Demand = MPN
Firms create demand

Supply of labor = individuals create supply

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12
Q

How is labor demand determined?

A

Change in wage
- begin at equilibrium where w* = MRPN
- rise in wage rate means w > MRPN
- employers have incentive to reduce N
- decline in wage rate means w < MRPN
- employers have incentive to increase N

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13
Q

What is the determination of labor demand?

A

W on the y axis and N on the x axis
MPN = demand for labor
Horizontal line w

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14
Q

How much labor do firms want to use?

A

If real wage > marginal product of labor (MPN), profit rises if the number of workers declines
The space between MPN and w0

If w < MPN, profit rises if the number of workers increases
Firms’ profits are highest when w = MPN

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15
Q

What are the factors that shift the labor demand curve?

A

Change in the supply labor causes a movement along the labor demand curve
- supply shocks shift labor demand curve to the right

Increase in the size of capital stock
- higher capital stock raises MPN so shifts the labor demand curve to the right

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16
Q

What is aggregate labor demand?

A

Sum of all firms’ labor demand
Supply shocks and size of capital stock shift firms’ aggregate labor demand

Moves ND upwards

17
Q

How does an increase in productivity and capital stock cause the labor demand curve to shift to the left?

A

Shifts curve to the right

Beneficial supply shock increases MPN and shifts MPN curve to the right

Higher capital stock increases MPN and shifts MPN to the right

18
Q

What is the supply of labor?

A

Determined by individuals
- aggregate supply of labor is the sum of individuals’ labor supply
- labor supply of individuals depends on labor-leisure choice

19
Q

What is the wealth-leisure trade-off?

A

Utility depends on consumption and leisure
Needs to compare costs and benefits of working another day
- costs leisure time
+ more consumption

If benefits of working another day exceed costs, work another day
Keep working additional days until benefits equal costs

20
Q

How does increase in real wage offset the substitution effect?

A

Higher real wage encourages work since the reward for working is higher
- one-day increase in real wage
- temporary increase has pure substitution effect since the effect on wealth is negligible

21
Q

How does increase in real wage offset the wealth effect?

A

Higher real wage increases income for the same amount of work time, so a person can afford more leisure, so will supply less labor
- pure wealth effect is when a person consumes more goods and takes more leisure (winning the lottery)

22
Q

How does the substitution and wealth effect take place together?

A

Higher income - substitution effect toward more work
Higher income means less work - wealth effect toward less work
Longer the increased income, the stronger the wealth effect
Substitution effect of an increase in real wage dominates the wealth effect

23
Q

How does an increase in real wage affect the labor supply curve?

A

Raise quantity of labor supplied
Curve relates the quantity of labor supplied to real wage
Upwards slope since higher wage encourages more people to work

24
Q

What are factors that shift the labor supply curve?

A

Wealth - higher wealth reduces labor supply so curve shifts to the left
Expected future real wage - higher expected future real wage is like an increase in wealth so curve sifts to the left

25
Q

What are factors that increase the labor supply?

A

Decrease in wealth
Decrease in expected future real wage
Increase in working-age population
Increase in labor force participation

26
Q

What is the labor market equilibrium?

A

Labour supply (NS) crosses labor demand (ND)
w on y axis
labor on x axis

27
Q

What does the classical model of labor market state?

A

Real wage adjusts quickly and on its own

28
Q

What is full-employment output?

A

Full-employment output = potential output = level of output when labor market is in equilibrium

Y = AF(K,N)

29
Q

What is the effect of a temporary adverse shock to production on the labor market?

A

ND shifts to the left, real wage falls and employment falls

30
Q

How long are people unemployed for?

A

Short duration
Unemployment spell = time an individual is continuously unemployed

31
Q

What is frictional unemployment?

A

Search activity of firms and workers due to heterogeneity

32
Q

What is NRU?

A

When output and employment are at full-employment levels
- frictional + structural
Cyclical: difference between actual unemployment rate and NRU

33
Q

What are alternative measures of the unemployment rate?

A
  1. Unemployed 15+ weeks
  2. Count job losers so it does not count people who quit
  3. Official rate
  4. 3 + discouraged workers
  5. 3 + 4 + marginally attached workers (want a job/looked for work in past year)
  6. 3 + 4 + 5 + part-time employment

Macroeconomics 2315 (10 decks)

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