CH3 ECO 3203 - Labor productivity and real wages • Some...

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Chapter 3 Basic Topics GDP measures total output and total income. Q1: What determines how much output the economy can produce? Output depends on the inputs What are the inputs? Potential output vs. actual output The production function: Measuring total factor productivity Constant returns to scale Marginal product and diminishing returns Cobb Douglas production function The competitive firm assumption: Firms are price takers Assuming constant returns to scale and perfect competition means economic profit is zero in the long run Economic profit vs. accounting profit The firm’s demand for labor and capital: Factor markets Labor supply and demand Marginal product of capital and the user cost of capital How income is distributed among labor and capital Based on marginal productivity of each factor
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Unformatted text preview: Labor productivity and real wages • Some empirical data Q2: Why does the demand for goods and services (C+I+G+NX) equal the supply of goods and services (potential output) in the long run? The demand for goods and services: • Consumption and saving • Investment • Government spending • Ignore net exports for now (topic of chapter 5) • Factors that affect consumption, investment, and government spending • Desired capital stock and the user cost of capital Definitions: • National saving • Private saving • Public or government saving • Crowding out If potential output = C+I+G then national saving = investment The real interest rate adjusts in the loanable funds market to balance national saving and investment. Equilibrium in the loanable funds market for a closed economy....
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This note was uploaded on 11/08/2011 for the course ECO 3203 taught by Professor Yang during the Fall '10 term at University of Central Florida.

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CH3 ECO 3203 - Labor productivity and real wages • Some...

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