1、National Income:Where it Comes From and Where it GoesChapter 3 Zhao,QiweiEconomics and Management School,WHUCHAPTER 3 National IncomeIn this chapter,you will learnlwhat determines the economys total output/incomelhow the prices of the factors of production are determinedlhow total income is distribu
2、tedlwhat determines the demand for goods and serviceslhow equilibrium in the goods market is achievedCHAPTER 3 National IncomeOutline of modelA closed economy,market-clearing modelSupply sidemfactor markets(supply,demand,price)mdetermination of output/incomeDemand sidemdeterminants of C,I,and GEquil
3、ibriummgoods marketmloanable funds marketFigure 3.1 The Circular Flow of Dollars Through the EconomyCHAPTER 3 National IncomeAn Economys OutputDepends on 1)Quantity of inputs,Factors of production2)Ability to turn inputs into output,production function.CHAPTER 3 National IncomeFactors of productionK
4、 =capital:tools,machines,and structures used in productionL =labor:the physical and mental efforts(time)of workers-We assume that 1)K and L as given,i.e.,fixed,and 2)fully utilized(no unemployment).Cf)Land,Materials,Energy,CHAPTER 3 National IncomeThe production functionldenoted Y=F(K,L)lshows how m
5、uch output(Y)the economy can produce fromK units of capital and L units of labor lreflects the economys level of technology lexhibits constant returns to scale (closely related to income distribution!)CHAPTER 3 National IncomeReturns to scale:A reviewInitially Y1 =F(K1,L1)Scale all inputs by the sam
6、e factor z:K2 =zK1 and L2 =zL1 (e.g.,if z=1.25,then all inputs are increased by 25%)What happens to output,Y2=F(K2,L2)?lIf constant returns to scale,Y2=zY1 lIf increasing returns to scale,Y2 zY1 lIf decreasing returns to scale,Y2 0CHAPTER 3 National IncomeExample 2decreasing returns to scale for any
7、 z 1CHAPTER 3 National IncomeExample 3increasing returns to scale for any z 1CHAPTER 3 National IncomeAssumptions of the model1.Technology is fixed.2.The economys supplies of capital and labor are fixed atCHAPTER 3 National IncomeDetermining GDPOutput is determined by the fixed factor supplies and t
8、he fixed state of technology:Increase in K and L and improvements in the production technology lead to growth in the economys output(Chapter 7 and 8).CHAPTER 3 National IncomeThe distribution of national incomeldetermined by factor prices,the prices per unit that firms pay for the factors of product
9、ion mwage=price of Lmrental rate=price of KCHAPTER 3 National IncomeNotation W =nominal wage R =nominal rental rate P =price of output W/P =real wage (measured in units of output)R/P=real rental rateCHAPTER 3 National IncomeHow factor prices are determinedlFactor prices are determined by supply and
10、demand in factor markets.lRecall:Supply of each factor is fixed.lWhat about demand?Figure 3.2 How a Factor of Production Is CompensatedCHAPTER 3 National IncomeDemand for laborlAssume markets are competitive:each firm takes W,R,and P as given.lBasic idea:A firm uses factors of production to maximize
11、 profit.lProfit=Revenue-Labor Costs-Capital Costs =PY WL RK =PF(K,L)WL-RKCHAPTER 3 National IncomeMarginal product of labor(MPL)ldefinition:The extra output the firm can produce using an additional unit of labor(holding other inputs fixed):MPL =F(K,L+1)F(K,L)CHAPTER 3 National IncomeExercise:Compute
12、&graph MPLa.Determine MPL at each value of L.b.Graph the production function.c.Graph the MPL curve with MPL on the vertical axis and L on the horizontal axis.LYMPL00n.a.110?219?3278434?540?645?749?852?954?1055?CHAPTER 3 National IncomeAnswers:CHAPTER 3 National IncomeYoutputMPL and the production fu
13、nctionLlabor1MPL1MPL1MPLAs more labor is added,MPL Slope of the production function equals MPLCHAPTER 3 National IncomeDiminishing marginal productlAs a factor input is increased,its marginal product falls(other things equal).lIntuition:Suppose L while holding K fixed fewer machines per worker lower
14、 worker productivityCHAPTER 3 National IncomeCheck your understanding:lWhich of these production functions have diminishing marginal returns to labor?CHAPTER 3 National IncomeDemand for LaborlFirms goal:maximize profits.lQ.Hire additional unit of labor or not?lA.Look at its effects on profit!lCompar
15、e extra revenue from extra output produced by the extra unit of labor to extra cost of higher spending on wagesCHAPTER 3 National IncomeDemand for LaborlExtra revenue from extra output produced by the extra unit of labor=MPL*PlExtra cost of higher spending on wages=WlChange of Profit=MPL*P WlFirms c
16、ontinue to hire additional unit of labor if 0.They stop if =0.lHence,we getl or CHAPTER 3 National IncomeMPL and the demand for laborEach firm hires labor up to the point where MPL=W/P.Units of outputUnits of labor,LMPL,Labor demandReal wageQuantity of labor demandedCHAPTER 3 National IncomeThe equilibrium real wageThe real wage adjusts to equate labor demand with supply.Units of outputUnits of labor,LMPL,Labor demandequilibrium real wageLabor supplyCHAPTER 3 National IncomeExercise(part 2)Suppo
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