mankiw7e-chap03

# mankiw7e-chap03 - Chapter 3 National Income...

This preview shows pages 1–13. Sign up to view the full content.

1 CHAPTER 3 National Income In this chapter, you will learn: In this chapter, you will learn: Chapter 3: National Income 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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 CHAPTER 3 National Income 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
3 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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
4 CHAPTER 3 National Income 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 technology exhibits constant returns to scale
5 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 = 1.2, then all inputs are increased by 20%) 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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6 CHAPTER 3 National Income Assumptions 1. Technology is fixed. 2. The economy’s supplies of capital and labor are fixed at and K K L L = = Determining GDP Output is determined by the fixed factor supplies and the fixed state of technology: , = ( ) Y F K L
7 CHAPTER 3 National Income The distribution of national income determined by factor prices , the prices per unit firms pay for the factors of production wage = price of L ren tal rate = price of K

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8 CHAPTER 3 National Income Notation W = nominal wage R = nominal rental rate P = price of output W / P = real wage (measured in units of output) R / P = real rental rate
9 CHAPTER 3 National Income How factor prices are determined Factor prices are determined by supply and demand in factor markets. Recall: Supply of each factor is fixed. What about demand?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10 CHAPTER 3 National Income Demand for labor Assume markets are competitive: each firm takes W , R , and P as given. Basic idea: A firm hires each unit of labor if the cost does not exceed the benefit. cost = real wage benefit = marginal product of labor ( , ) profit PF L K WL KR = - -
11 CHAPTER 3 National Income Marginal product of labor ( MPL   ) definition: The extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL = F ( K , L +1) – F ( K , L ) = ( , ) F K L L

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
CHAPTER 3 National Income MPL and the production function  F K L ( , ) Y
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 06/12/2011 for the course ECON 101 taught by Professor Dee during the Spring '10 term at Andhra University.

### Page1 / 53

mankiw7e-chap03 - Chapter 3 National Income...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online