Lecture3 - ECONOMICS 100B Professor Steven Wood 1/26/10...

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ECONOMICS 100B Professor Steven Wood 1/26/10 Lecture 3 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS Exam dates will be moved back one lecture. These will be reposted on bSpace. Exam I will now be on February 23 , Tuesday. Exam II will be on April 6 , also a Tuesday. LECTURE Last week we talked about some big macroeconomic issues such as long-term economic growth, short-term business fluctuations, and why the economy fluctuates around long-term growth. The way we measure economic output is through real gross domestic product. Another big issue we talked about was labor resources and unemployment rate. Today we want to look at the relationship between how much economic output is generated and how much employment there is in the economy. Remember that at the end of the last lecture, I said that we will build a model that will allow us to handle both Keynesian and Classical economic modeling processes. We will need three different markets, one of those being the labor market. Today we are going to look at the aggregate production function and how it relates to the demand for labor. The Production Function Let’s start with the production function. The production function simply tells us how businesses use capital and labor to produce output with a given level of technology or productivity. When we talk about capital in this context we are talking about physical productive capital such as buildings, tools, and other physical things. This physical capital comes about through business investment. Our production function essentially takes into account the factors of production such as capital (K), labor (N) and the other We will talk very little about “other” in macroeconomics. Mostly, we will focus on capital and labor as factors of production. In the macroeconomic sense, these other factors of production are not very important. For example, let’s think about Japan. Japan has very little land mass and very little domestically produced energy, yet it is still one of the richest economies in the world. You can have a small geographic space and still be a highly productive country. These other factors of production are generally things that a company can purchase if they need to. However, labor and capital must be available inside the country. Technology or productivity (A) tells us how we use these factors of production to produce output. What we mean by technology is the recipes- what do we know about how to use labor and capital to produce output? Technology and productivity is a knowledge-based issue. In macroeconomics, we do not use the term
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Lecture3 - ECONOMICS 100B Professor Steven Wood 1/26/10...

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