chapter 17 the economy at full employment

chapter 17 the economy at full employment - CHAPTER 17 The...

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CHAPTER 17 The Economy at Full Employment
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                  Chapter Seventeen                             2 Lecture Outline 1a. Using production functions to describe the relationship between the level of output & the factors of production 1b. Understanding the slope of a production function & diminishing marginal returns to a factor of production 2a. Relationship between the real wage & the demand for labour: the labour demand curve 2c. How the amount of employment in an economy or equilibrium in the labour market is determined by the demand for & supply of labour 2d. Understanding how changes in the demand for and/or supply of labour affects the equilibrium real wage and the equilibrium employment level 3. The full-employment or potential output model a. definition of full-employment or potential output b. determinants of full-employment or potential output c. applications of the full-employment model 4. Assumptions of the real business cycle theory 5. Understanding the competing demands for output and the resultant crowding out effect FYR
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                  Chapter Seventeen 3 The Production Function Production function The relationship between the level of output (GDP) and the factors of production. We assume that there are only two factors of production: Stock of capital : all the machines, equipment and buildings in the entire economy. Labour : Human effort, including both physical and mental effort, used to produce goods and services.
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                  Chapter Seventeen 4 The production function is written as follows:
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5 Y = F(K,L)
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                  Chapter Seventeen 6 With the stock of capital fixed at the constant level K*, only variations in labour can change the level of output in the economy. With capital fixed, the relationship between output and labour shown here reflects the principle of diminishing returns. Principle of Diminishing Returns Suppose output is produced with two or more inputs and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns— output will increase at a decreasing rate.
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                  Chapter Seventeen 7 Output and Labour Input Y (Output) L (Labour Input) 1,000 300 1,500 400 1,900 500 2,200 600 As the amount of labour increases, so does the amount of output produced. As output increases, it increases at a diminishing rate.
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8 When capital increases from K * to K **, the production function shifts up. At any level of labour
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This note was uploaded on 02/12/2012 for the course ECON EC1101 taught by Professor Ms during the Spring '08 term at National University of Singapore.

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chapter 17 the economy at full employment - CHAPTER 17 The...

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