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Ch13-National_Income

Ch13-National_Income - CHAPTER 13 The Model of National...

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1 Chapter Thirteen CHAPTER 13 The Model of National Income

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2 Chapter Thirteen The heart of the market system lies in the “market clearing” process and the consequences of individuals pursuing self-interest. In this chapter, we will develop a basic classical model to explain various economic interactions.
Chapter Thirteen P Q P* Q* S D The place where Classical-model mechanics are made easy! Welcome to... Welcome to...

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4 Chapter Thirteen An economy’s output of goods and services (GDP) depends on: (1) quantity of inputs (1) ability to turn inputs into output
5 Chapter Thirteen L K The factors of production are the inputs used to produce goods and services. The two most important factors of production are capital and labor . In this chapter, we will take these factors as given (hence the overbar depicting that these values are fixed). K (capital) = K L (labor) = L In this chapter, we’ll also assume that all resources are fully utilized, meaning no resources are wasted.

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6 Chapter Thirteen The available production technology determines how much output is produced from given amounts of capital (K) and labor (L). The production function represents the transformation of inputs into outputs . A key assumption is that the production function has constant returns to scale, meaning that if we increase inputs by z, output will also increase by z. We write the production function as: Y = F ( K , L ) Output Output is is some function of some function of our given inputs our given inputs To see an example of a production function –let’s visit Ku’s Bakery…
7 Chapter Thirteen Ku’s Bakery production function shows that the number of loaves produced depends on the amount of the equipment and the number of workers . If the production function has constant returns to scale, then doubling the amount of equipment and the number of workers doubles the amount of bread produced. The workers hired to make the bread are its labor. The kitchen and its equipment are Ku’s Bakery capital. The loaves of bread are its output.

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8 Chapter Thirteen We can now see that the factors of production and the production function together determine the quantity of goods and services supplied , which in turn equals the economy’s output. So, Y = F ( K , L ) = Y In this section, because we assume that capital and labor are fixed, we can also conclude that Y (output) is fixed as well.
9 Chapter Three Economists measure a firm’s economic profit as total revenue minus total cost, including both explicit and implicit costs. Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. When total revenue exceeds both explicit and implicit costs, the firm earns economic profit.

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Ch13-National_Income - CHAPTER 13 The Model of National...

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