Topic 2- Productivity, Output and Employment Flashcards
Give 4 factors of production
- Capital (K)
- Labour (N)
- Others (raw materials, land, energy)
- Productivity of factors which depends on tech and management
What is the production function?
Y = AF(K,N)
What is A in the production function?
Total factor productivity
What is the Cobb-Douglas production function?
Y = (AK^a)x(N^1-a)
What are the 2 main properties of the shape of the production function?
- Slopes upward: more of any input increases output
- Slope becomes flatter: diminishing marginal product as input increases
What is the formula for marginal product of capital (MPK)?
MPK = dY/dK = A(δF/δK)
What part of the production function gives MPK?
The gradient
What is the formula for the marginal product of labour (MPN)?
MPN = dY/dN = A(δF/δN)
What part of the production function gives MPN?
The gradient
What are supply shocks?
They’re changes in an economy’s production function as they affect the amount of output that can be produced for given quantities of capital and labour. Can be positive or negative
Give 3 examples of supply shocks
- Inventions/innovations
- Extreme weather
- Oil price changes
What is a firm’s profit function?
π = p x Y(K,N) - (WxN)
What is the Utility function?
U = U(c,L)
c=consumption L=leisure
What is the time constraint of Utility?
T = work time + leisure time
When should one keep working?
If the benefits of working another day exceeds the cost, work another day. Keep increasing labour time until benefits equal costs
What is the substitution effect?
Higher real wage encourages work, since the opportunity cost of leisure is higher. The opportunity cost being the current real wage rate
What is the income effect?
Higher real wage increases income for the same amount of work time, so the person can afford more leisure; thus they will work less
What is a pure substitution effect?
A one-day rise in the current real wage as the effect on lifetime income is negligible
What strengthens the income effect?
The bigger the change in lifetime resources
What is a pure income effect and why is it so?
An increase in wealth e.g winning the lottery because it doesn’t effect the price of leisure so a person will both consume more goods and take more leisure
Give 2 factors that shift the individual labour supply curve
- Wealth: higher wealth reduces labour supply
- Expected future real wage: A higher expected real wage rate is like an increase in wealth
Give 4 factors that increase the aggregate labour supply
- Decrease in wealth
- Decrease in expected future wage rate
- Increase in working age population
- Increase in labour-force participation rate
What is the labour force (NF)?
Those who are able to have a job and want to have one. It is the maximum amount of labour that could be supplied
What are 2 main assumptions of the labour market equilibrium?
- In a competitive labour market there is no involuntary unemployment
- Any temporary deviation of the economy form the equilibrium is assumed to be eliminated by a movement in real wages
What do the exponents of the Cobb-Douglas function represent?
a is the elasticity of output with respect to capital (Ɛk). 1-a is the elasticity of output with respect to labour (Ɛn)
What does the elasticity of output with respect to capital (Ɛk) mean?
A 1% increase in capital input leads to an a% increase in output
What does the elasticity of output with respect to labour (Ɛn) mean?
A 1% increase in labour results in a (1-a)% increase in output
What is the formula for the elasticity of output with respect to capital (Ɛk)?
Ɛk = (ΔY/Y)/(ΔK/K) = (ΔY/ΔK) x K/Y
What is the short-run time horizon?
The time period during which aggregate output and employment can change but before prices and wages respond to the changes in the economy-wide output and employment levels
What is real-wage rigidity?
The idea that the real wage rate moves too little in response to conditions in the aggregate labour market
What is price stickiness?
The tendency of prices to respond only slowly to changes in the economy
What is the medium-run time horizon?
The time period during which prices and wages can respond to changes in aggregate output and employment while the economy’s capital stock and labour force are still fixed
What is the long-run time horizon?
In the long-run, we allow for growth in the population, in the physical capital stock, the human capital stock and improvements in technology
What is the optimality condition of a firm’s profit?
dπ/dN = p x dY/dN - W = 0
Which formula gives the quantity of labour demanded at a given W level?
p x 𝛿Y/𝛿N = W
What is the formula for marginal revenue product (MRPN)?
MRPN = p x 𝛿Y/𝛿N = p x MPN
When is it optimal for firms to increase the quantity of labour demanded?
When MRPN > W or MPN > w
When is it optimal for firms to reduce the quantity of labour demanded?
When MRPN < W or MPN < w
What is the aggregate labour demand (ND)?
The sum of all firms labour demand
What is the aggregate labour demand function?
ND = ND(w; A, K, Ω)
What does Ω denote?
A set of any other variable that can affect ND
What is the formula for labour force (NF)?
Labour force = Employed + Unemployed
NF = E + V
Who is included in the adult population (pop)?
All those over 16
What are discouraged workers?
People who have become so discouraged by lack of success at finding a job that they stop searching
What is the formula for unemployment rate (u)?
u = number of unemployed/labour force = V/NF
What is the formula for participation rate?
Labour force/Adult population = NF/Pop
What is an unemployment spell?
The period of time during which an individual is continuously unemployed
What is the length of time of a spell called?
Its duration
What is a completed spell?
It begins when someone becomes unemployed and ends when that person is no longer unemployed
What is an incomplete spell?
Spells that have not yet ended
What is Frictional Unemployment?
The unemployment that arises as individuals search for suitable jobs and firms search for suitable workers
What is Structural Unemployment?
Unemployment arising from mismatches between workers’ skills and employers’ requirements, or between workers’ locations and employers locations
What causes Structural Unemployment?
When old and dying industries are replaced with new ones that require different skills and are located in different areas of the country
What are the Chronically Unemployed?
Workers who are unemployed a large part of the time. Usually, the lack of skills prevents them from finding long-term employment
What is Cyclical Unemployment?
Unemployment caused by the business cycle
How is Cyclical Unemployment mathematically related to Total unemployment?
uc = u - un
Cyclical unemployment = unemployment - natural rate of unemployment
What is the natural rate of unemployment (un)?
The unemployment rate when output and employment are at full-employment levels
How is the natural rate of unemployment (un) related to frictional and structural unemployment?
Natural rate of unemployment is equal to frictional and structural unemployment
What is Okun’s Law?
The quantitative impact on aggregate output of a change in the unemployment rate
What is the formula for Okun’s Law?
Y-Y/Y = 2(u-un)
What does Okun’s Law show?
The % gap between full-employment (Y*) and actual output (real GDP, Y) is 2 times the cyclical unemployment rate
What is the modified Okun’s Law formula?
ΔY/Y = 3 - 2Δu
