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Unformatted text preview: 1 Macroeconomics Chapter 3: National Income. P’ O Tuitional EBA Macroeconomics 2 The Circular Flow of Dollars Through the Economy Market for Factors of Production Firms Markets for G&S Households Government Fin Markets 3 Total production of Goods and Services ¡ The Factor of Production ¢ Factors of production are the inputs used to produce output. ¢ K = Capital ¢ L = labor ¢ For now, to keep our analysis simple, we assume fixed amount of K and L. 4 The Production Function Y = F(K,L) ¡ Many production function have a property called constant returns to scale. ¡ Constant returns to scale. zY=F(zK,zL) ¡ In this chapter, because we assume that the supplies of K and L and the technology are fixed, output is also fixed (at Y) 5 How is National Income Distributed to the factors of Production? ¡ Recall, the total output equals its total income. ¡ Factor prices- Factor prices are the amounts paid to the factor.- The wage worker earn.- The rent the owners of capital collect. Quantity of Factor Factor price 6 The Decisions facing the Competitive Firm ¡ Recall, ¡ Similarly, our firm cannot influence the wages and rental. Profit = Revenue – Labor Costs – Capital Costs = PY - WL - RK 7 The firm’s Demand for Factors ¡ The marginal Product of Labor (MPL)....
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