Economy pulled out of rough patch due to strong exports, however economic slow downs overseas will most likely put us in a rough patch later this year.
The economy grew 3.3% in the past few months, however it shrunk for the last quarter of 2007.
- 2007 Growth Rates
Negative in quarter 4, positive in 08' Q1, technically not a recession (need 2 quarters of negative growth)
- Unemployment
Not getting worse from where we are
- Test Questions
Inflation Rate, 2nd quarter growth, GDP growth rates (nominal and real), general knowledge of what's going on in the economy (especially for optimal business performance)
- Classical Macroeconomics (Output and Employment)
The Classical Revolution
Developed during the 19th century in response to the economic doctrines known as mercantilism
- The wealth of a nation depends on it's stock of precious metals
- The state is needed to control and direct the economic system
Radical revolution when it was said that economic systems run best when no one is in charge (free market)
Democracy and Free Market came around the same time
- Classical Views (Adam Smith, The Wealth of Nations)
In contrast, classical economists emphasized:
- The real nature of the production of nation's wealth
- Real factors (how much housing, food, quality of clothing, stuff that a nation has is it's wealth (welfare)
- Unrestrained markets tend to produce better economic growth and higher levels of productivity than economies that are constrained by governmental control
- Free market allows the people to show what they want, and free businesses produce what people want, and if they aren't producing what people want, the business goes belly up
- Two main focuses
- More workers, capitol, resources, machines, technologies, ideas (Not gold and silver)
- Keep the government out! (Lazzie-faire) How does the government know what the people want
- Focus on productivity
- We're still in the process of refining the above two thoughts, Classical Economists didn't get it exactly right (Cane). The core of their ideas are right
- Russian and Chinese economic revolutions: Major shifts toward capitalist principles
- This class is about government control and how it affects the economy
- Production
- Production function - summarizes the relationship between total inputs and total outputs assuming a given technology
- Y = F(Kbar, N) ... (Kbar = Fixed Capital)
- Marginal Product of Labor (MPN) - The addition of total output realized with the addition of a unit of labor input (other inputs remaining unchanged)
- Capitol, the Short Run and the Long Run
- Capitol - the tools, equipment and machinery used in the production process
- Fixed in the short run
- Short Run - the time period during which the amount of capital used in the production process is unchanged
- Long Run - the length of time it takes for the firm to alter it's quantity of output
- Diminishing Marginal Product
- Physical environment puts a constraint on the output
- As you add more variable inputs (students) the output (learning) diminishes (problems for professor maintaining order in the classroom to have everyone's attention) The incremental output from adding an additional input is going to start going down as compared to the previous input
- In the short run, the marginal product of labor will start to decline at some point as the quantity of labor is increased
- For a given wage paid labor, the marginal cost of labor usage must rise as it's marginal product falls
- MC = W / MPN (W is a nominal wage, MPN is how much can be produced by the unit of W)
- Short Run Profit Maximization
- Short run profit maximization requires that P - MC = W / MPN OR -- MPN = W / P --
- W is the money wage, MC is the marginal cost and P is the level of prices (CPI, GDP Deflator) MPN is the Marginal Product of Labor
- Labor Demand
- Since the marginal product of labor declines as more labor is used in the short run, it must be the case that the real wage (W / P) declines with additions of labor as well
- The demand for labor is simply the relationship between the real wage and the quantity of labor
- The real wage is inversely relations to the amount of labor
- Example of Labor Demand
- Show factory with 3 machines
- 1 cuts leather, 2 sews leather in the form of a shoe, 3 packages the completed shoes
- Each machine requires one operator
- The manager of the plant runs an experiment to determine the productivity of this equipment (All union workers have the same skill sets and are paid the same amount)
- On Monday a worker is hired to produce shoes (4 pairs in a day, one machine at a time)
- On Tuesday another worker is hired to help (two machines can run at the same time, A&B or A&C) (output is increased to 9 pairs of shoes)
- On Wednesday, a third worker is hired, all 3 machines running a the same time (15 pairs of shoes)
- On Thursday, a fourth worker is hired. There is some down time due to lunch breaks and clean up time. The fourth worker covers breaks and cleans up while the others are working. (20 pairs of shoes)
- On Friday, a fifth work is hired to do the same job as the fourth. (Output is increased to 24 pairs of shoes)
- A sixth worker only adds 2 more pairs of shoes (26 pairs a day)
- A seventh worker doesn't add any output, the marginal productivity has diminished (26 pairs a day)
- An either worker causes management problems and only 25 pairs are produced (people are getting in each others way)
- Diminishing Marginal Productivity is the reason why the labor demand graph is negatively sloped
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