W4

Question 1

factors of production

Answer 1

1. Capital (K) (i.e., factories, machines, software, and intellectual property)
2. Labor (N) (i.e., workers)
3. Others (raw materials, land, energy)
4. Productivity of factors depends on technology and management

Question 2

the production function:

Answer 2

𝒀=𝑨𝑭(𝑲,𝑵)

Question 3

Increases in productivity, 𝑨 relates to

Answer 3

improvements in production technology or to any other change in the economy that allows capital and labor to be utilized more effectively.

Question 4

two main properties of production functions

Answer 4

Slopes upward: more of any input produces more output. Slope becomes flatter as input rises: diminishing marginal product as input increases

Question 5

slope of production function

Answer 5

𝑀𝑃𝐾 = ∆𝑌/∆𝐾; 𝑀𝑃𝑁 = ∆𝑌/∆𝑁 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.

Question 6

why does 𝑀𝑃𝐾 (𝑀𝑃𝑁) declines as 𝐾(𝑁) increases

Answer 6

MPK is the slope of the production function, the slope of the production function decreases as the capital stock is increased.

Question 7

𝑀𝑃𝐾 (𝑀𝑃𝑁) is always positive

Answer 7

Whenever the capital stock is increased, more output can be produced.

Question 8

Supply shock = productivity shock

Answer 8

a change in an economy’s production function

Question 9

i. beneficial supply shock ii. adverse supply shock

Answer 9

> 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.

Question 10

Examples of supply shocks

Answer 10

1. Changes in weather (drought) or natural disasters (floods, fires).
2. Inventions or innovations in management techniques that improve efficiency (computerized inventory control or statistical analysis in quality control).
3. Changes in government regulations (i.e., antipollution laws, that affect the technologies or production methods used).
4. changes in the supplies of factors of production other than capital and labor that affect the amount that can be produced.

Question 11

labor demand

Answer 11

𝑀𝑅𝑃𝑁=𝑃×𝑀𝑃𝑁

If 𝑤 > 𝑀𝑃𝑁 profit rises if number of workers declines

If 𝑤 < 𝑀𝑃𝑁, profit rises if number of workers increases

Firms’ profits are maximised when 𝑤 = 𝑀𝑃𝑁

Question 12

What factors that shift the labor demand curve?

Answer 12

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.

Question 13

Labor supply of individuals depends on

Answer 13

labor-leisure choice This leads to the income-leisure trade-off:

Question 14

in two ways an increase in the real wage affects the labor supply decision

Answer 14

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)

Question 15

The labor supply curve

Answer 15

Labor supply curve slopes upward because higher wage encourages people to work more.

Question 16

Labor supply can increase in two ways:

Answer 16

Intensive margin – refers to changes in hours worked of existing workers.

Extensive margin – refers to changes in number of workers hired.

Question 17

Equilibrium in the labor market

Answer 17

* full-employment level of employment 𝑁 ̅ * corresponding market-clearing real wage is 𝑤

̅ Classical model of the labor market – 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: can’t study unemployment!

Question 18

Full-employment output (𝑌 ̅)

Answer 18

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 (𝑁 ̅).

Question 19

full-employment output, 𝑌 ̅ equation

Answer 19

𝒀 ̅=𝑨𝑭(𝑲,𝑵 ̅ ) Anything that changes 𝑁 ̅ or the production function will change 𝑌 ̅.

E.g., an adverse supply shock that reduces the 𝑀𝑃𝑁 (Fig. 3.10) works in two distinct ways to lower full-employment output

Question 20

Effect of an adverse supply shock

Answer 20

slide 20

Question 21

Labour force UE PR Empl. ratio

Answer 21

Labor Force = Employed + Unemployed

Unemployment Rate = Unemployed/Labor Force

Participation Rate = Labor Force/Adult Population

Employment Ratio = Employed/Adult Population

Question 22

How long are people unemployed? (2)

Answer 22

Unemployment spell = period of time an individual is continuously unemployed

Duration = length of unemployment spell

Question 23

(4) Unemployment Duration and the 2007-2009 Recession

Answer 23

1. Measurement issues
2. The extension of unemployment benefits
3. Very large job losses
4. Weak economic recovery

Question 24

4 different types of unemployment

Answer 24

Frictional Structural Natural rate of UE cyclical UE

Question 25

The natural rate of unemployment (𝒖 ̅) equation

Answer 25

= frictional + structural unemployment

Question 26

cyclical UE EQUATION

Answer 26

= diff between actual unemployment rate and natural rate of unemployment (𝑢 −𝑢 ̅).

Question 27

Okun’s law

Answer 27

The quantitative impact on aggregate output of a change in the unemployment rate according to ^^

• the gap between an economy’s full-employment output and its actual level of output increases by 2 percentage points for each percentage point the unemployment rate increases.

Question 28

Okun’s law EQ

Answer 28

(𝒀 ̅−𝒀)/𝒀 ̅ =𝟐(𝒖−𝒖 ̅ ) percentage gap between potential and actual output equals 2 times the cyclical unemployment rate

Question 29

growth rate form of Okun’s law.

Answer 29

∆𝒀/𝒀=𝟑−𝟐∆𝒖 Eq. (3.6) says that when unemployment is rising (∆𝑢>0 ), actual output, 𝑌, is growing more slowly than 3% per year, which is the average growth rate of full-employment output in the United States.

Note that, Eq. (3.6), which requires the assumption that the natural rate of unemployment is constant,

Question 30

How is MPN related to labor demand?

Answer 30

The MPN curve is related to labor demand, because firms hire workers up to the point at which the real wage equals the marginal product of labor (i.e., 𝐰∗ = 𝐍∗)

Labor demand curve shows relationship between the real wage rate and the quantity of labor demanded. It is the same as the MPN curve, since 𝒘 = 𝑴𝑷𝑵 at equilibrium.

So, the labor demand curve is identical to the MPN curve, except that the vertical axis is the real wage instead of the marginal product of labor.