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CHAPTER 3: PRODUCTIVITY, OUTPUT, AND EMPLOYMENT INTRODUCTION This chapter's main goal is to provide the background ofa theoretical model ofthe economy that is developed throughout the textbook. The discussions ofthe labour market and production function developed in this chapter are the basic building blocks ofeverything that comes later. Section 3.1 begins the chapter by introducing the production function-the main determinant ofoutput. Then, Section 3.2 discusses the demand for labour, showing how firms decide on how much labour to use based on the wage and the marginal product oflabour. Section 3.3 then shows how people decide how much labour to supply. Demand and supply together determine equilibrium in the labour market, as Section 3.4 discusses. The section also shows how labour-market equilibrium then determines the economy's rate offull-employment output and what happens when there's a change in either the demand or supply oflabour. Section 3.5 provides an introduction to unemployment-how it's measured, how long it lasts, and why it occurs. Section 3.6 talks about Okun's Law, which relates output to unemployment. This is a long and very important chapter. It's the first chapter in which the main analytic device used throughout the chapter appears-a diagram in which equilibrium is found where two curves cross. You will find the same basic diagram that appears here for the labour market also appears in other chapters for other markets. So be sure you understand why the labour-demand and labour-supply curves have the slopes they do, what shifts them, and how equilibrium is determined. You'll see a similar pattern in many other places in the textbook. It is important to remember when reviewing the summary tables in this and other chapters, that when the effects ofa change in one variable are discussed that this is the only change that has occurred. That is, we assume that there has been no change in any other variable. If you have trouble understanding some ofthe math in the chapter, be sure to work many ofthe numerical problems in this study guide and in the textbook. Specifically, practice calculating output using a production function and related problems. CHAPTER OUTLINE y I. How Much Does the Economy Produce? The Production Function (Sec. 3.1) A. Factors ofproduction slope = MPK 1. Capital 2. Labour 3. Others (raw materials, land, energy) 4. Productivity of factors depends on technology and management B. The production function Y=AF(K,N) (3.1) 2. Parameter A is "total factor productivity" Figure 3.1 C. Application: The production function and productivity growth in Canada Cobb-Douglas production function works well for Canadian economy: Y=AKJ.3!f·7 (3.2) 2. Data for Canadian economy-Table 3.1 Productivity growth calculated using production function a.
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This note was uploaded on 10/20/2010 for the course MATH 100 taught by Professor A during the Spring '10 term at Wilfred Laurier University .

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