Econ Midterm 3 Section 7

Front 1

there are three main variables in which we would be interested

Back 1

Outcome/Income = Y
Inflation (prices) = P
Unemployment = L

Front 2

we call the relationship between Higher P = Lower Y and Lower P = Higher Y

Back 2

Aggregate Demand

Front 3

What is the production function?

Back 3

Y = f(K,L)

Front 4

Capital variable

Back 4

K

Front 5

Labor Variable

Back 5

L

Front 6

What are effective units of labor?

Back 6

How much each unit of labor produces

Front 7

Amount of output one can produce per unit of labor, depend on education and training, and the greater the education or training the more output per unit of labor

Back 7

Human Capital

Front 8

holds that firms pay workers in relation to their productivity level

Back 8

Labor economic theory

Front 9

the process through which employment is decided occurs in....

Back 9

the Labor Market

Front 10

households who might want to work

Back 10

Labor Supply

Front 11

firms who might want to hire workers

Back 11

Labor Demand

Front 12

Who demands labor and Why?

Back 12

Firms, to produce output which they can sell to get revenue

Front 13

How does a firm decide whether to hire an additional worker?

Back 13

It will look at how hiring that worker affects it profit

Front 14

Profit =

Back 14

Total Revenue - Total Cost

Front 15

Total Revenue =

Back 15

P x Q

Front 16

How does hiring an additional worker affect Total Cost?

Back 16

Have to pay that worker the wage rate

Front 17

variable for Nominal wage rate

Back 17

W

Front 18

How does hiring an additional worker affect Total Revenue?

Back 18

An additional worker produces additional output which is sol at the marker price to produce to generate revenue

Front 19

Additional revenue from hiring an additional worker

Back 19

Marginal Revenue Product of Labor

Front 20

MRP(L) = PxMP(L) tells us...

Back 20

that the degree to which a worker adds to a firm's revenue depends on two things
(1) the additional output that the worker produces MP(L)
(2) the price the firm is able to charge for that additional unit P

Front 21

If MPR(L) > W then...

Back 21

the worker adds more revenue than he or she costs; the firm should hire the worker

Front 22

if MRP(L) < W then...

Back 22

the worker adds less revenue than he or she costs; the firm should not hire the worker

Front 23

Firms hire works until...

Back 23

MRP(L) = W

Front 24

We say that the demand for labor is a ________________ because it depends on the demand for the output that the labor produces

Back 24

Derived Demand

Front 25

MP(L) =

Back 25

Worker productivity

Front 26

Who makes the decision to supply labor?

Back 26

Households; to determine how households make this choice, we need to think about their goals

Front 27

What is each household's goal?

Back 27

Maximize utility; So we need to think about how working affects utility

Front 28

How do households gain from working?

Back 28

They earn income which they can use to buy stuff gives them utility

Front 29

How do households lose from working?

Back 29

They have to work, which means that they are not able to do other things which might give them utility with that time

Front 30

hours that you get paid to work

Back 30

Labor

Front 31

hours that you do not get paid to work

Back 31

leisure

Front 32

both labor and leisure affect...

Back 32

utility

Front 33

labor gives income which can be used to buy

Back 33

utility

Front 34

Opportunity cost of leisure variable

Back 34

W

Front 35

as leisure becomes more expensive you substitute away from leisure and into labor, and vice versa

Back 35

Substitution Effect ↑ W → ↑ Labor and ↓ Leisure

Front 36

as the wage rate increase you an earn the same amount of income with fewer hours work so you can to "purchase" more leisure by working fewer hours, and vice versa

Back 36

Income effect ↑ W → ↓ Labor and ↑ Leisure

Front 37

we can now describe how a household's decision of the number of hours to work relates to the wage rate

Back 37

Backward-Bending Labor Supply

Front 38

refers to the idea that above some wage rate people will actually respond to wage increases by working less

Back 38

The Backward-Bending Labor Supply

Front 39

searching for the "right job"

Back 39

Frictional Unemployment

Front 40

jobs lost to the vagaries of the business cycle, during recessions unemployment increases, during expansions unemployment decreases

Back 40

Cyclical Unemployment

Front 41

jobs lost when structure of economy changes and economy cannot employ everyone who wants a job

Back 41

Structural Unemployment

Front 42

an acceptable rate of unemployment

Back 42

natural rate of unemployment

Front 43

the natural rate of unemployment by definition is called

Back 43

full-employment

Front 44

we want to think about the amount of output that the economy will produce at different price levels

Back 44

Aggregate Supply

Front 45

firms hire until the real wage equals ??

Back 45

Marginal Product of Labor

Front 46

Period of time short enough that some variables are fixed

Back 46

Short-Run

Front 47

Period of time long enough that all variables are variable

Back 47

Long-Run

Front 48

What do we assume about real wage in the LR?

Back 48

It is fixed

Front 49

We call this Long-Run Aggregate Supply and it is vertical because...

Back 49

Price does not affect output in the Long-Run

Front 50

the amount of output that is produced when the economy is operating at full employment; the level of output at which output is fixed in the Long-Run

Back 50

Potential Output - Y(P)

Front 51

this is the word where we assume that nominal wages are fixed in the Short-Run

Back 51

"Sticky wages"

Front 52

unions sign multi-year contracts so wages do not change in the short-run

Back 52

Explicit Contracts

Front 53

Pay higher wages (about MPR(L) so workers are afraid to lose their jobs and therefore work harder

Back 53

Efficiency Wages

Front 54

Legally prohibit firms from dropping wages in short-run beyond some level

Back 54

Minimum Wage Laws

Front 55

What happens when there is an increase in the price level?

Back 55

Real Wage Decreases and Employment Increases

Front 56

What happens when there is a decrease in the price level?

Back 56

Real Wage Increases and Employment Decreases

Front 57

increasing AD creates a disequilibrium, upward pressure on P, P increases firms hire more works and Y increases

Back 57

Expansionary Policies

Front 58

Real wage increases meaning that additional workers are more expensive to firm

Back 58

Decreasing Capacity

Front 59

Decreasing P causes consumers to..

Back 59

Increase quantity demanded

Front 60

Decreasing real wage cause firs to...

Back 60

hire more workers which causes firms to produce more output at each given price level

Front 61

Fiscal and Monteary policies affect the economy by precipitating changes in

Back 61

Aggregate Demand

Front 62

goes back to production, so these are things that cause the production function to shift

Back 62

Aggregate Supply

Front 63

The AS shifts when firms want to employ a different amount of capital at each given price by these causes:

Back 63

Technology shocks, Input Price changes, Permanent workforce changes, Public Policy

Front 64

AD increases then P increases

Back 64

Demand Pull inflation

Front 65

AS decreases then P increases

Back 65

Cost Push

Front 66

encourage education, worker training programs

Back 66

Increasing Human Capital (government effecting changes)

Front 67

tax code changes to encourage investment, encourage more saving because saving is needed for investment

Back 67

Increasing Capital Investment (government effecting changes)