LEC III Long run model

LEC III Long run model - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style 11/8/10 Macro Module Lecture III The Classical Long-Run Model 11/8/10 Classical vs. Keynesian &#2; Classical model &#2; Long-run the economy operates close to its potential output, at full employment &#2; Useful in explaining the long-run trend &#2; Keynesian model &#2; Understand economic fluctuations - movements in output around its long-run trend 22 11/8/10 The Classical Model &#2; Assumption: Markets clear &#2; Adjustment of prices until quantities supplied and demanded are equal &#2; Quantity of output produced &#2; Identify markets &#2; Identify buyers and sellers &#2; Identify the market structure 33 11/8/10 The Labor Market &#2; Labor supply curve &#2; How many people want to work at various real wage rates &#2; Slopes upward - as the wage rate increases &#2; more and more individuals are better off working than not working &#2; the number of people in the economy who want to work increases 44 11/8/10 The Labor Market &#2; Labor demand curve &#2; How many workers firms want to hire at various real wage rates &#2; Slopes downward - as the wage rate increases &#2; maximize profit - firms employ fewer workers than before &#2; decreases the quantity of labor demanded in the economy 55 11/8/10 The Labor Market 66 150 million = Full Employment 1 5 H E J B A L D Excess Demand for Labor Excess Supply of Labor L S Number of Workers Real Hourly Wage $ 2 5 2 11/8/10 The Labor Market &#2; Markets clear: economy achieves full employment on its own &#2; Wage rate > equilibrium wage rate &#2; Excess supply of labor &#2; Wage rate < equilibrium wage rate 77 11/8/10 Determining the Economys Output &#2; Assumptions &#2; Labor the only resource that varies &#2; Amount of other resources - fixed &#2; State of technology does not change 88 11/8/10 The Production Function &#2; Aggregate production function &#2; Total output the economy can produce &#2; With different quantities of labor &#2; Fixed amounts of other resources &#2; Fixed state of technology &#2; Diminishing returns to labor 99 11/8/10 The Production Function 10 150 million Aggregate Productio n Function 150 million Number of Workers Real Hourly Wage $ 2 L S L D In the labor market, the demand and supply curves intersect to determine employment of 150 million workers. The production function shows that those 150 million workers can produce $10 trillion of real GDP....
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This note was uploaded on 11/07/2010 for the course ECON 0001 taught by Professor Kitsikopoulos during the Spring '08 term at NYU.

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LEC III Long run model - Click to edit Master subtitle...

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