W4 Flashcards
factors of production
- Capital (K) (i.e., factories, machines, software, and intellectual property)
- Labor (N) (i.e., workers)
- Others (raw materials, land, energy)
- Productivity of factors depends on technology and management
the production function:
π=π¨π(π²,π΅)
Increases in productivity, π¨ relates to
improvements in production technology or to any other change in the economy that allows capital and labor to be utilized more effectively.
two main properties of production functions
Slopes upward: more of any input produces more output. Slope becomes flatter as input rises: diminishing marginal product as input increases
slope of production function
πππΎ = βπ/βπΎ; πππ = βπ/βπ The marginal product of capital (MPK) is the output produced per unit of additional capital.
The MPK can be shown graphically using the production function.
The MPN curve shows the marginal product of labor at each level of employment.
why does πππΎ (πππ) declines as πΎ(π) increases
MPK is the slope of the production function, the slope of the production function decreases as the capital stock is increased.
πππΎ (πππ) is always positive
Whenever the capital stock is increased, more output can be produced.
Supply shock = productivity shock
a change in an economyβs production function
i. beneficial supply shock ii. adverse supply shock
> raises the amount of output that can be produced for given quantities of capital and labor.
> lowers the amount of output that can be produced for each capital-labor combination.
Examples of supply shocks
- Changes in weather (drought) or natural disasters (floods, fires).
- Inventions or innovations in management techniques that improve efficiency (computerized inventory control or statistical analysis in quality control).
- Changes in government regulations (i.e., antipollution laws, that affect the technologies or production methods used).
- changes in the supplies of factors of production other than capital and labor that affect the amount that can be produced.
labor demand
ππ ππ=πΓπππ
If π€ > πππ profit rises if number of workers declines
If π€ < πππ, profit rises if number of workers increases
Firmsβ profits are maximised when π€ = πππ
What factors that shift the labor demand curve?
Supply shocks: Beneficial supply shock raises MPN, so shifts labor demand curve to the right; opposite for adverse supply shock.
Size of capital stock: Higher capital stock raises MPN, so shifts labor demand curve to the right; opposite for lower capital stock.
Labor supply of individuals depends on
labor-leisure choice This leads to the income-leisure trade-off:
in two ways an increase in the real wage affects the labor supply decision
Substitution effect: Higher real wage encourages work, since reward for working is higher (LS INCREASES)
Income effect: An increase in the real wage makes workers effectively wealthier because for the same amount of work they now earn a higher real income.
Someone who is wealthier will be better able to afford additional leisure and, as a result, will supply less labor. (LS FALLS)
The labor supply curve
Labor supply curve slopes upward because higher wage encourages people to work more.
Labor supply can increase in two ways:
Intensive margin β refers to changes in hours worked of existing workers.
Extensive margin β refers to changes in number of workers hired.
Equilibrium in the labor market
* full-employment level of employment π Μ * corresponding market-clearing real wage is π€
Μ Classical model of the labor market β the real wage adjusts reasonably quickly to equate labor supply and labor demand.
- if labor supply is less than labor demand, firms competing for scarce workers bid up the real wage, whereas if many workers are competing for relatively few jobs, the real wage will tend to fall.
- Problem with classical model: canβt study unemployment!
Full-employment output (π Μ )
potential output, is the level of output that firms in the economy supply when wages and prices have fully adjusted.
same as when aggregate employment equals its full-employment level (π Μ ).
full-employment output, π Μ equation
π Μ =π¨π(π²,π΅ Μ ) Anything that changes π Μ or the production function will change π Μ .
E.g., an adverse supply shock that reduces the πππ (Fig. 3.10) works in two distinct ways to lower full-employment output
Effect of an adverse supply shock
slide 20
Labour force UE PR Empl. ratio
Labor Force = Employed + Unemployed
Unemployment Rate = Unemployed/Labor Force
Participation Rate = Labor Force/Adult Population
Employment Ratio = Employed/Adult Population
How long are people unemployed? (2)
Unemployment spell = period of time an individual is continuously unemployed
Duration = length of unemployment spell
(4) Unemployment Duration and the 2007-2009 Recession
- Measurement issues
- The extension of unemployment benefits
- Very large job losses
- Weak economic recovery
4 different types of unemployment
Frictional Structural Natural rate of UE cyclical UE
