Chapter 3 Flashcards
(98 cards)
1
Q
Factors of production are classified into
A
- Capital
- Labour
- Others
Others include Raw material, land, energy
2
Q
The amount of output produced depends on the quantities of
A
Capital and labor and their productivity
3
Q
Productivity depends on
A
technology and management
4
Q
Production Function is
A
A mathematical expression relating the amount of output
produced to quantities of capital and labor utilized, given current state of technology
5
Q
The production Function
State the Production Function Formula
A
Y = A F (K, N)
‘Y’ is real output and ‘A’ is overall total factor productivity
6
Q
Cobb-Douglas
Production Function
A
Y = A (K^α) (N^(1-α))
7
Q
This production function applies to
Y = A F (K, N)
A
Both an economy as a
whole and individual firms
8
Q
This production function applies to
Y = A F (K, N)
A
Both an economy as a
whole and individual firms
9
Q
Increase in productivity (A) happens from
A
Improvements in technology or any other change in the economy that allows capital and labor to be utilized more effectively
10
Q
The Shape of the production function is
A
Upward sloping but with decreasing slope as increasing the variable on the x-axis
11
Q
Why does the slope of the production function becomes flatter as input rises
A
Diminishing marginal
product as input increases
12
Q
Marginal Product of Capital is
A
The increase in output produced that results from one-unit increase in the capital stock.
13
Q
MPK =
A
Change in Y/ Change in K
14
Q
The slope of production function graph (Y vs. K) is the same as
A
MPK
15
Q
Two main properties of production functions:
A
- MPK/MPN is always positive (more K increases Y or more N increases Y)
- Diminishing marginal productivity of capital/Labour (MPK declines as K rises or MPN declines as N rises)
16
Q
Marginal Product of Labor is
A
The increase in output produced that results from one-unit increase in labor
17
Q
MPN =
A
Change in Y/ Change in N
18
Q
The slope of production function graph (Y vs. N) is the same as
A
MPN
19
Q
Supply shocks involves a change
Productiivity shocks
A
In an economy’s production function
20
Q
Supply shocks affect the
A
output that can be
produced for a given amount of inputs
21
Q
Supply shocks incorporates changes in
A
The supply of factors of production other than capital and labor or changes that affect technologies or production methods used
22
Q
Positive supply shocks can happen from
A
- Inventions
- Innovation in Management techniques
- Government regulations
- Oil prices
23
Q
Positive supply shock raises
A
Output for a given amount of K and N
Upward Shift
24
Q
Negative supply shock can happen because of
A
Unfavorable Weather, Oil prices
25
Negative supply shock leads to
a Lower output for a
given amount of K
and N
| Downward shift
26
To be able to answer the following question:
"How much labor do firms want to use?", a set of assumptions must set
| List these assumptions
* Hold capital stock fixed.
* Workers are all alike
* Labor market is competitive.
* Firms demand the amount of labor that maximizes profits.
27
How firms demand the amount of labor that maximizes profits
It compares the cost of additional labor (wage) with its additional benefit (additional output produced)
28
Marginal Product of Labor (MPN) measure
The benefit of employing an additional worker in terms of extra output produced
29
Marginal Revenue Product of Labor (MRPN) measures
The benefit of employing an additional worker in terms of extra
revenue produced
30
MRPN =
P multiplied by MPN
31
To Maximize Profit the firm will either
| The profit-maximizing point for a Firm
* Set the nominal wage equal to the marginal revenue product of labor
* Set the real wage equal to the marginal product of labor
32
W = MRPN where the 'W' here represent
Nominal Wage
33
w = MPN where the 'w' here represent
Real Wage=W/P
34
Increase employment if for an additional worker
| Elaborate both in real and Nominal terms
MPN>w (Real terms)
P x MPN > W (Nominal terms)
35
Decrease Employment if for the last worker employed
| Elaborate both in real and nominal terms
MPN < w (Real terms)
P x MPN < W (Nominal terms)
36
MPN curve is the same as
Labor demand curve
37
Labour demand curve shows
The quantity demanded of labor at any real wage
38
Any point on the labor demand curve is a
Profit maximising point
39
How changes in real wages affect the labour demand curve
Movements along the curve
40
An increase in productivity will cause
| Factor that shifts the aggregate labour curve
The labour demand curve shifts to the Right
41
An increase in Capital stock causes
| Factor that shifts the aggregate labour curve
The labour demand curve shifts to the Right
42
The Reason behind shifts of the aggregate labour demand curve when productivity increases
Beneficial supply shock increases MPN and shifts MPN curve up and to the right
43
The Reason behind shifts of the aggregate labour demand curve when **Capital stock** increases
Higher capital stock increases MPN and shifts MPN curve up and to the right
44
Aggregate Labor Demand is the
sum of the labor demands of all the firms in an economy.
45
How does Supply shocks and change in the capital stock affect the aggregate labor demand
Causes a shift
46
Aggregate labour demand curve looks exactly like
Labor demand for an individual firm
47
The supply of labor is determined by
Households
48
To determine how much to work, individual compare
Benefit (income earned) with cost (forgone leisure)
49
Leisure refers to
all off-the-job activities
| E.g. Eating, Sleeping etc.
50
What should individuals do to maximize utility
Individuals should work until the utility received from additional income equals the loss of utility associated with the missed leisure
51
Real Wage is the
Amount of real income the worker receives in exchange for giving up a unit of leisure for work
52
Two effects arise when Real wage increase
1. Substitution effect
2. Income effect
53
Substitution effect is
The tendancy to supply more labour due to higher wages
| One day rise in real wage
54
Income Effect is
Tendency to
supply less labor due to becoming wealthier
| E.g. Winning a lottery or an increase in expected future income
55
Which effect is related to an increase in labour supply
Substitution Effect
56
Which effect is related to a decrease in labour supply
Income effect
57
What are some of the factors that can affect the Income and Substitution effect?
1. Length of time the increase is expected to last.
2. Intial level of income
3. Person’s family situation
4. Income tax rate
58
Which effect is more likely to persue if there is a temporary increase in Wages
Substitution effect
59
Which effect is more likely to persue if there is a high income tax rate
Income effect
60
The labor supply curve Relates the amount of labor supplied to
The current real wage rate (expected future real wage)
| holding other factors constant
61
Why Labor supply curve is upward sloping
Because as current wage rate inc. the supply of labor inc.
62
What factors causes the labor supply curve to shift to the left
* Inc. in expected income
* Inc. in wealth
63
Aggregate labor supply curve
It is the total amount of labor supplied by everyone in the economy
64
An increase in the current economy-wide real wages would cause a raise or reduction in the quantity of labor supplied ?
Raises quantity of labor since an inc. in w could encourage people out of the labour force to seek work
65
Factors that causes a shift in the labor supply curve
* Wealth
* Expected future real wage
* Working-Age population
* Participation rate
66
Factors that causes the labor supply curve to shift to the left
* Wealth
* Expected future wage
67
Factor that causes the supply curve to shift to the right
* Working age population
* Participation rate
68
Why does an inc. in wealth causes the labor supply curve to shift to the left
Increase in wealth increases amount of leisure workers can afford
69
How is equilibrium determined in the labor market?
When aggregate quantity of labor demanded equals aggregate quantity supplied
70
When sketching the labor market equilibrium, if there was temporary adverse supply shock what happens to the new equilibrium
Demand curve for labor will shift to the left leading to
* Lower real wage
* Employment falls
71
Permenant supply shocks causes a shift in
in both demand and supply
72
What is the main issue that could have caused the following:
Lower expected future wage consequently a rightward shift in labor supply curve
A permenant supply shock
73
Full employment output is the level of output denotes
* firms in the economy supply when wages and prices have fully adjusted
* it is the level of output supplied when aggregate employment equals its full-employment level
74
# (Y-bar) = A.F(K, N-bar)
What would affect Y-bar
Any change in N-bar or A
75
How would adverse supply shock that reduces MPN affect Y-bar
* Reduces A hence lowering ouput directly
* Reduces demand for labor and hence reduces N-bar that reduces Y-bar
76
Adverse supply shock lowers labor demand, reducing employment and real wage, as well as reducing
Output
77
Participation rate is
Fraction of adult population (working age population) in the labor force.
| = Labor Force ÷ Adult Population
78
Discouraged workers are
Unemployed people that decided to leave the labor force
| not working in activities outside the labor market
79
Unemployment spell
The period of time that an individual is continously unemployed
80
Duration of unemployment spell
The length of time that an unemployment spell lasts
81
Complete unemployment spell
It begins when the person become unemployed till he is no longer unemployed
82
Incomplete or ongoing spells
Are spells that have not ended
83
Mean duration of unemployment is
The average length of incomplete spells
84
Duration of unemployment spells increase during
Recession
| and decrease during expansions
85
Even at full employment, Unemployment rate is not zero
1. Frictional Unemployment
2. Structural unemployment
86
Frictional unemployment happens due to
Matching process
87
Frictional unemployment happens due to
Matching process
88
Structural unemployment is
Long-term chronic unemployment
89
Structural unemployment happens due to
Low skilled labor or relocation of labor across industries
90
Natual rate of unemployment prevails when
Output and employment are at full level
91
Cyclical unemployment is
The difference between actual unemployment rate (u) and natural unemployment rate (u-bar)
92
If cyclical unemployment is positive then
| What is happening in terms of output and employment
Output and employment are below
their full employment levels
93
If cyclical unemployment is negative then
Output and employment exceeds their full employment levels
94
Okun's law is considered a ________ more than a law
Rule of Thumb
95
Okun's law show the relation between
output (relative to potential
output) and cyclical unemployment
## Footnote
i.e. how changes in unemployment affects output
96
State the equation of okun's law
(Y-bar minus Y)/ Y-bar = 2(u-(u-bar))
97
According to Okun's law, for each percentage point increase in unemployment, the gap
between full employment output and actual level of output increases by
2% point
98
According to Okun's law, the percentage gap between potential and actual output equals 2 times
Cyclical unemployment
