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ES10002- Introductory Macroeconomics > Topic 2- Productivity, Output and Employment > Flashcards

Topic 2- Productivity, Output and Employment Flashcards

1
Q

Give 4 factors of production

A
  • Capital (K)
  • Labour (N)
  • Others (raw materials, land, energy)
  • Productivity of factors which depends on tech and management
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2
Q

What is the production function?

A

Y = AF(K,N)

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3
Q

What is A in the production function?

A

Total factor productivity

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4
Q

What is the Cobb-Douglas production function?

A

Y = (AK^a)x(N^1-a)

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5
Q

What are the 2 main properties of the shape of the production function?

A
  • Slopes upward: more of any input increases output

- Slope becomes flatter: diminishing marginal product as input increases

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6
Q

What is the formula for marginal product of capital (MPK)?

A

MPK = dY/dK = A(δF/δK)

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7
Q

What part of the production function gives MPK?

A

The gradient

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8
Q

What is the formula for the marginal product of labour (MPN)?

A

MPN = dY/dN = A(δF/δN)

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9
Q

What part of the production function gives MPN?

A

The gradient

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10
Q

What are supply shocks?

A

They’re changes in an economy’s production function as they affect the amount of output that can be produced for given quantities of capital and labour. Can be positive or negative

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11
Q

Give 3 examples of supply shocks

A
  • Inventions/innovations
  • Extreme weather
  • Oil price changes
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12
Q

What is a firm’s profit function?

A

π = p x Y(K,N) - (WxN)

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13
Q

What is the Utility function?

A

U = U(c,L)

c=consumption L=leisure

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14
Q

What is the time constraint of Utility?

A

T = work time + leisure time

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15
Q

When should one keep working?

A

If the benefits of working another day exceeds the cost, work another day. Keep increasing labour time until benefits equal costs

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16
Q

What is the substitution effect?

A

Higher real wage encourages work, since the opportunity cost of leisure is higher. The opportunity cost being the current real wage rate

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17
Q

What is the income effect?

A

Higher real wage increases income for the same amount of work time, so the person can afford more leisure; thus they will work less

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18
Q

What is a pure substitution effect?

A

A one-day rise in the current real wage as the effect on lifetime income is negligible

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19
Q

What strengthens the income effect?

A

The bigger the change in lifetime resources

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20
Q

What is a pure income effect and why is it so?

A

An increase in wealth e.g winning the lottery because it doesn’t effect the price of leisure so a person will both consume more goods and take more leisure

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21
Q

Give 2 factors that shift the individual labour supply curve

A
  • Wealth: higher wealth reduces labour supply

- Expected future real wage: A higher expected real wage rate is like an increase in wealth

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22
Q

Give 4 factors that increase the aggregate labour supply

A
  • Decrease in wealth
  • Decrease in expected future wage rate
  • Increase in working age population
  • Increase in labour-force participation rate
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23
Q

What is the labour force (NF)?

A

Those who are able to have a job and want to have one. It is the maximum amount of labour that could be supplied

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24
Q

What are 2 main assumptions of the labour market equilibrium?

A
  • In a competitive labour market there is no involuntary unemployment
  • Any temporary deviation of the economy form the equilibrium is assumed to be eliminated by a movement in real wages
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25
Q

What do the exponents of the Cobb-Douglas function represent?

A

a is the elasticity of output with respect to capital (Ɛk). 1-a is the elasticity of output with respect to labour (Ɛn)

26
Q

What does the elasticity of output with respect to capital (Ɛk) mean?

A

A 1% increase in capital input leads to an a% increase in output

27
Q

What does the elasticity of output with respect to labour (Ɛn) mean?

A

A 1% increase in labour results in a (1-a)% increase in output

28
Q

What is the formula for the elasticity of output with respect to capital (Ɛk)?

A

Ɛk = (ΔY/Y)/(ΔK/K) = (ΔY/ΔK) x K/Y

29
Q

What is the short-run time horizon?

A

The time period during which aggregate output and employment can change but before prices and wages respond to the changes in the economy-wide output and employment levels

30
Q

What is real-wage rigidity?

A

The idea that the real wage rate moves too little in response to conditions in the aggregate labour market

31
Q

What is price stickiness?

A

The tendency of prices to respond only slowly to changes in the economy

32
Q

What is the medium-run time horizon?

A

The time period during which prices and wages can respond to changes in aggregate output and employment while the economy’s capital stock and labour force are still fixed

33
Q

What is the long-run time horizon?

A

In the long-run, we allow for growth in the population, in the physical capital stock, the human capital stock and improvements in technology

34
Q

What is the optimality condition of a firm’s profit?

A

dπ/dN = p x dY/dN - W = 0

35
Q

Which formula gives the quantity of labour demanded at a given W level?

A

p x 𝛿Y/𝛿N = W

36
Q

What is the formula for marginal revenue product (MRPN)?

A

MRPN = p x 𝛿Y/𝛿N = p x MPN

37
Q

When is it optimal for firms to increase the quantity of labour demanded?

A

When MRPN > W or MPN > w

38
Q

When is it optimal for firms to reduce the quantity of labour demanded?

A

When MRPN < W or MPN < w

39
Q

What is the aggregate labour demand (ND)?

A

The sum of all firms labour demand

40
Q

What is the aggregate labour demand function?

A

ND = ND(w; A, K, Ω)

41
Q

What does Ω denote?

A

A set of any other variable that can affect ND

42
Q

What is the formula for labour force (NF)?

A

Labour force = Employed + Unemployed

NF = E + V

43
Q

Who is included in the adult population (pop)?

A

All those over 16

44
Q

What are discouraged workers?

A

People who have become so discouraged by lack of success at finding a job that they stop searching

45
Q

What is the formula for unemployment rate (u)?

A

u = number of unemployed/labour force = V/NF

46
Q

What is the formula for participation rate?

A

Labour force/Adult population = NF/Pop

47
Q

What is an unemployment spell?

A

The period of time during which an individual is continuously unemployed

48
Q

What is the length of time of a spell called?

A

Its duration

49
Q

What is a completed spell?

A

It begins when someone becomes unemployed and ends when that person is no longer unemployed

50
Q

What is an incomplete spell?

A

Spells that have not yet ended

51
Q

What is Frictional Unemployment?

A

The unemployment that arises as individuals search for suitable jobs and firms search for suitable workers

52
Q

What is Structural Unemployment?

A

Unemployment arising from mismatches between workers’ skills and employers’ requirements, or between workers’ locations and employers locations

53
Q

What causes Structural Unemployment?

A

When old and dying industries are replaced with new ones that require different skills and are located in different areas of the country

54
Q

What are the Chronically Unemployed?

A

Workers who are unemployed a large part of the time. Usually, the lack of skills prevents them from finding long-term employment

55
Q

What is Cyclical Unemployment?

A

Unemployment caused by the business cycle

56
Q

How is Cyclical Unemployment mathematically related to Total unemployment?

A

uc = u - un

Cyclical unemployment = unemployment - natural rate of unemployment

57
Q

What is the natural rate of unemployment (un)?

A

The unemployment rate when output and employment are at full-employment levels

58
Q

How is the natural rate of unemployment (un) related to frictional and structural unemployment?

A

Natural rate of unemployment is equal to frictional and structural unemployment

59
Q

What is Okun’s Law?

A

The quantitative impact on aggregate output of a change in the unemployment rate

60
Q

What is the formula for Okun’s Law?

A

Y-Y/Y = 2(u-un)

61
Q

What does Okun’s Law show?

A

The % gap between full-employment (Y*) and actual output (real GDP, Y) is 2 times the cyclical unemployment rate

62
Q

What is the modified Okun’s Law formula?

A

ΔY/Y = 3 - 2Δu

ES10002- Introductory Macroeconomics (6 decks)

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