ECO360 Class Notes Exam 2.docx - ECO 360 EXAM2 Start of...

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ECO 360 EXAM2 Start of Notes 10/3/17 GDP o What we know so far, this semester What’s included in GDP: C, I, G, and NX The interest rate helps facilitate the flow of money for spending and investment The impact of ups and downs of GDP: unemployment and inflation BUT WHAT DETERMINES GDP What Determines GDP o Factors of Production (inputs) Labor- time and effort people spend working Capital- set tools workers use o Ability to turn inputs into output (technology) An economic Model of a Competitive Firm o Competitive- little control over market prices and wages o Terminology for model. The firm will: Pay its workers wages W For an amount of labor, L Rent its amount of capital, K At the interest rate R Sell its good at price P Sell Y unites of its goods Economic Profit o The firm’s goal- maximizing economic profit o Income that is left over, after the firm has paid for all of it’s factors of production o Economic Profit= Revenue- Labor Costs- Capital Costs o Economic Profit= P * Y - W * L – R * K o There is some combination of K and L that will maximize economic profit Assumptions in the Model o The inputs are both fully and efficiently utilized o Prices adjust quickly and easily (the market clears fast) o The demand for each input depends on its productivity (what you can get from it) We will stufy o How the income dervived from production gets divided between the owners of the factors…. Check phone Labor and Capital Quantities o There is some combination of K and L that will maximize economic profit o In general, the more of each factor the firm “employs”… The greater production will be The less that will be gained from each additional unit Diminishing Marginal Returns Marginal Productivities Marginal Productivity of Labor (MPL) or Marginal Productivity of Capital(MPK)
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ECO 360 EXAM2 Start of Notes 10/3/17 o If one input increases while the amount of the other stays constant. Its marginal Productivity declines but then increase the other marginal productivity increases if the other one stays o How did the “Black Death” contribute to diminishing social classes Land: Little (land) POST PLAGUE- SAME (land) MPK decreased Labor: lots (of labor) POST PLAGUE- far fewer MPL increases Maximizing Economic Profit o If we can say Profit= Revenue – Costs o We can also say that Delta Profit= Delta Revenue- Delta Costs o Generally, firms want to be larger
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