student_ch3 - Ch3.Nationalincome CHAPTER 3 National Income...

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1 CHAPTER 3 National Income Ch3. National income
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2 CHAPTER 3 National Income In this chapter, you will learn: In this chapter, you will learn: How much do the firms produce in the economy? what determines the economy’s total output/income Who gets the income from production? how the prices of the factors of production are determined
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3 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
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4 CHAPTER 3 National Income
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5 CHAPTER 3 National Income Factors of production K = L =
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6 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 exhibits
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7 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 = and L 2 = ( 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 ( ), If increasing returns to scale ( ) , If decreasing returns to scale ( ) ,
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8 CHAPTER 3 National Income Returns to scale:  Example 1 ( , ) F K L KL = ( , ) ( )( ) F zK zL zK zL = constant returns to scale for any z > 0
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9 CHAPTER 3 National Income Returns to scale:  Example 2 ( , ) F K L K L = + ( , ) F zK zL zK zL = + decreasing returns to scale for any z > 1
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10 CHAPTER 3 National Income Returns to scale:  Example 3 ( , ) F K L K L = + 2 2 ( , ) ( ) ( ) F zK zL zK zL = + 2 2 increasing returns to scale for any z > 1
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