- Fed's interest rates holding steady around 2%
- Expansion of the money supply is inflationary
- NY Fed bank website
- Market up, down ahead of jobs report
- Hedge fund fails as bubble bursts: bets on commodity prices rising caused Hedge fund to fail, down 40% YTD. Inelastic demand curve of gas caused prices to go up in the beginning of the summer as supply was down, just as prices fell because supply went up at the end of the summer.
The Production Function:
- Demand theory is relatively the same between economic theories
- As real wages fall, employment will increase and vice versa.
- Diminishing Marginal Product can't tell you how many workers to hire just based on productivity, you need earnings and wages. Hire people up to the point where you're making more money than you're paying your employee (not counting other expenses). W (wage) /P (price per item sold) = N (real wage)
Inverse relationship between demand and the real wage ( W/P=N) Use N to determine the number of workers based on MPN
Labor Supply
- Classical economists assumed that the substitution effect dominated the income effect so that workers will want to supply more labor at higher real wages and less labor at lower real wages.
- Works best when applied to piece work or commission based pay
- Substitution effect: people want money and time off, if the wage rises the price of leisure goes up (time off costs money)
- Income effect: as my income goes up, I don't have to work as much...or I'm able to buy more normal goods (leisure goods)
- In today's world, the income effect is more dominant (but not in the classical Marco view)
Labor Market Equilibrium
- Labor supply is equal to labor demand
- The equilibrium determines the real wage paid to labor
- In the short run, this equilibrium value of labor usage determines the output level for a given stock of capital
- Kaynes agreed with this
What will happen if prices double or triple and wages remain the same?
- Demand for labor increases as prices go up
- Labor supply decreases, people become more valuable to companies and they want more of them...substitution effect kicks in and the price of leisure goes down, people start working less (creates an excess demand for labor, above equilibrium)... Wages have to be pushed up so real wage doesn't drop as much (Flexible wage hypothesis)
- If prices start to fall, workers are less valuable...substitution effect says people want to work more because the leisure time causes too much of a loss in wages
- Money wages get pushed up when prices go up, and vice versa
- Classical economists concluded that labor will stay constant as long as prices and wages fall or rise together
- Flexible Wage Theory (Kaynes disagreed)
- Kaynes said if price go up, people will act the same as if their wages were cut. Just as if prices fall, they will act as if their wages increased
- People will react to prices changing by adjusting their labor supply
Consequences for Production when Money Wages are Flexible
- If money wages change in response to changes in the price level then price changes will have little or no impact on the aggregate level of production
Aggregate Supply
- Vertical curve, stays the same over different prices over the short run (price-quantity graph)
- Output depends on labor force size, facilities
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