Ch3a - In this chapter We shift from economic measurement to economic analysis Goal understand what affects the long-term performance of the

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slide 0 In this chapter … We shift from economic measurement to economic analysis . Goal: understand what affects the long-term performance of the economy. What determines the following? Productive capacity, living standards, and long-run levels of employment. CHAPTER 3 National Income

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slide 1 Determination of output The more GDP an economy produces, the more people are able to consume and enjoy a higher living standard. What determines the quantity of goods and services a country can produce? A country’s productive capacity. Quantity of inputs – factors of production The effectiveness with which inputs are used – productivity. CHAPTER 3 National Income
slide 2 CHAPTER 3 National Income Factors of production K = capital: tools, machines, and structures used in production L = labor: the physical and mental efforts of workers

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slide 3 CHAPTER 3 National Income The production function denoted 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 technology exhibits constant returns to scale
slide 4 CHAPTER 3 National Income Returns to scale: A review Initially Y 1 = F ( K 1 , L 1 ) Scale all inputs by the same factor z : K 2 = zK 1 and L 2 = zL 1 ( e.g. , if z = 1.25, then all inputs are increased by 25%) What happens to output, Y 2 = F ( K 2 , L 2 )? If constant returns to scale , Y 2 = zY 1 If increasing returns to scale , Y 2 > zY 1 If decreasing returns to scale , Y 2 < zY 1

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slide 5 CHAPTER 3 National Income Example 1 constant returns to scale for any z > 0
slide 6 CHAPTER 3 National Income Example 2 decreasing returns to scale for any z > 1

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slide 7 CHAPTER 3 National Income Example 3 increasing returns to scale for any z > 1
slide 8 CHAPTER 3 National Income Now you try… Determine whether constant, decreasing, or increasing returns to scale for each of these production functions: (a) (b)

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slide 9 CHAPTER 3 National Income Answer to part (a) constant returns to scale for any z > 0
slide 10 CHAPTER 3 National Income Answer to part (b) constant returns to scale for any z > 0

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This note was uploaded on 05/08/2011 for the course ECON 362 taught by Professor Birz during the Fall '08 term at Binghamton University.

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Ch3a - In this chapter We shift from economic measurement to economic analysis Goal understand what affects the long-term performance of the

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