321LecNote03Ch3

# 321LecNote03Ch3 - Instructor Kim H.H Spring 2011...

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Instructor : Kim, H.H. Intermediate Macro Analysis Spring 2011 Economics 01:220:321 Chapter 3. National Income : Where It Comes From and Where It Goes In this chapter, you will learn: what determines the economy’s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand for goods and services how equilibrium in the goods market is achieved Outline of model A closed economy, market-clearing model Supply side factor markets (supply, demand, price) determination of output/income Demand side determinants of C, I, and G Equilibrium goods market loanable funds market

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2 Factors of production K = capital: ________________________________________ L = labor: ________________________________________ The production function: Y = F(K,L) shows how much output ( Y ) the economy can produce from K units of capital and L units of labor reflects the economy’s level of _____________ exhibits constant __________________________ Returns to scale: A review - Initially Y 1 = F ( K 1 , L 1 ) - Scale all inputs by the same factor z : _______________________________________ ( e.g. , if z = 1.2, then all inputs are increased by_____________) - What happens to output, Y 2 = F ( K 2 , L 2 )? If constant returns to scale , _____________ If increasing returns to scale , _____________ If decreasing returns to scale , _____________ Returns to scale: Example 1 (,) FKL KL FzKzL Returns to scale: Example 2  K L
3 Returns to scale: Example 3 (,) () ( ) FzKzL zK zL NOW YOU TRY: Returns to Scale Determine whether each of these production functions has constant, decreasing, or increasing returns to scale: (a)  2 , K FKL L (b) , FKL K L  Answers

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4 Assumptions Technology is fixed. The economy’s supplies of capital and labor are fixed at _______________________________________ Determining GDP Output is determined by the fixed factor supplies and the fixed state of technology: ____________________________________________________ The distribution of national income determined by _____________, the prices per unit firms pay for the factors of production wage = _____________ rental rate = _____________price of K Notation W = nominal wage R = nominal rental rate P = price of output W / P = _____________ (measured in units of output) R / P = ___________________ How factor prices are determined Factor prices are determined by _______________________________________ Recall: Supply of each factor is fixed. What about demand? Demand for labor Assume markets are competitive: each firm takes __________________________ Basic idea: A firm hires each unit of labor if the cost does not exceed the benefit.
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## This note was uploaded on 03/24/2011 for the course ECON 321 taught by Professor Sani during the Spring '08 term at Rutgers.

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321LecNote03Ch3 - Instructor Kim H.H Spring 2011...

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