Lecture 6 Labor Supply Demand

Lecture 6 Labor Supply Demand -...

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ECO 320L, Fall 2010, Professor Beatrix Paal updated 9/8/2010 Lecture 6: Labor Supply and Labor Demand 1/12 Lecture 5 Labor Supply and Labor Demand Last time ± stocks and flows ± the aggregate production function ( Chapt e r 3 . 1 , Exampl e 3 . 1 ) Today ± overview of the labor market ± labor demand ( e r 3 . 2 ) ± labor supply ( e r 3 . 3 ) Next time ± labor market equilibrium ( e r 3 . 3 ) ± TFP experiments ( e r 9 . 1 ) ± the FE line ( e r 9 . 1 ) ± unemployment ( e r 3 . 4 ) Overview of the general equilibrium model Microfoundations ± modern macroeconomics builds on microeconomics Actors (rational) ± households ± firms ± government Three markets (competitive) ± labor market (Ch 3) ± goods market (Ch 4: closed economy, Ch 5: open economy) ± asset market (Ch 7) Aggregation ± we will simplify each of these markets by ignoring heterogeneity of workers, jobs, goods, assets used as money, other financial assets, etc. ± terminology: ³UHSUHVHQWDWLYH FRQVXPHU´ RU ³UHSUHVHQWDWLYH ILUP´ LV XVHG ± WKLV ZLOO DOORZ XV WR IRFXV RQ WKH ³ELJ SLFWXUH´ ± functioning of each market ± interactions between markets
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ECO 320L, Fall 2010, Professor Beatrix Paal updated 9/8/2010 Lecture 6: Labor Supply and Labor Demand 2/12 The markets Labor market ± households supply labor ± firms demand labor ± real wage adjusts to equilibrate the market Goods market ± recall national income accounting identity: Y = C + I + G + NX ± C: demand for consumption by consumers ± I : demand for investment goods by firms and by consumers (new housing) ± G: demand for goods by the government ± NX = EX ± IM: net demand for domestically produced goods by foreigners ± firms supply output: Y ± Which price adjusts to equilibrate the goods market? The real interest rate. Asset market ± households (and firms) demand money ± central bank and the banking system supply money ± price level adjusts to equilibrate the market We assume these markets are competitive ± useful baseline; deviations from competitive assumption can also be studied Households Market participation ± labor market: supply labor ± goods market: demand consumption goods and investment goods ± asset market: hold money and other financial assets, have debts Objective ± maximize utility ± derive utility from consumption and from leisure ± care about current and future values of consumption and leisure Constraint ± budget constraint ± each period, income from labor and ownership of assets pays for consumption and for purchases of assets ± assets can be negative: debt ± in their lifetime, consumers must repay all debt
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ECO 320L, Fall 2010, Professor Beatrix Paal updated 9/8/2010 Lecture 6: Labor Supply and Labor Demand 3/12 Firms Market participation ± labor market: demand labor ± goods market: supply output, demand investment goods ± asset market: may hold money or other financial assets Objective ± maximize profits ± profit stream: current and expected future profits ± present value of expected profits is what matters Constraint ± technology limits how much they can produce with the capital they own and the
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Lecture 6 Labor Supply Demand -...

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