Lecture 3 - ECONOMICS 100B Professor Steven Wood 01/25/11...

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ECONOMICS 100B Professor Steven Wood 01/25/11 Lecture 3 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Aggregate Production and Productivity Today we will talk about the economy’s aggregate production function. Agenda Determinants of Aggregate Production: In Microeconomics we talk about production functions for individual firms. We are going to make an analogy to that, but we are going to do that at a Macroeconomic level. Determination of Factor Prices: what are factor prices or returns to factors of production? In order to produce you need factor inputs like capital, labor, land, oil, financial capital and etc. So factor prices are what are being earned. For example return for labor is wage, and this would be the factor price of labor Distribution of national income: how much of the national income does each of the factors of production receive? Determinants of Aggregate Production Total amount of production, which measures with real GDP will be determined by how many factors of production we have. Also, it is determined by the production function, which tells us how those factors of production are transformed into economic output. In the macro economy we typically talk about only two factors of production: labor and capital . This is because in macro economies, we can make choices of industries that we have based on resources we have or don’t have. For instance, Japan has no domestic oil supply, but it has a high level of economic output. It turns out that factors of production can be traded for, so we do not have to be concerned about other factors at the macro level. An economy with more labor and a certain amount of capital can produce more than an economy with less labor but with same amount of capital. For now we are going to make two assumptions. Labor and capital supply is fixed. The bar over the letter means fixed at a certain level. These assumptions make both variables (L, K) exogenous variables. Exogenous means determined outside of the model. Exogenous variables are not the variables that the fluctuation that we are trying to explain. We can relax these assumptions a little bit later. This is a very generalized production function. Y = F(K,L) It means that real GDP (given by Y) is equal to some function of the amount of capital and labor that we have in the economy. We still have to think about that function, because this function tells us how we translate factor inputs into economic output. The Cobb-Douglas production function:
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This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.

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Lecture 3 - ECONOMICS 100B Professor Steven Wood 01/25/11...

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