Classical Macro Theory

1

• Classical Macro Theory

2
Classical Macro Theory

• Assumptions
• Rational Self-Interest

3
Classical Macro Theory

• Assumptions
• Rational Self-Interest
• Absence of Money Illusion

4
Classical Macro Theory

• Assumptions
• Rational Self-Interest
• Absence of Money Illusion
• Pure Competition

5
The Production Function

• Shows the relationship between the quantities of
  factors of production land, labor, capital, and
  entrepreneurship employed in the economy and
  total output of goods and services.
• y F (N)
• This says that output of goods and services
  depend on the number of labor employed.

6
The Production Function

• In the short run, all factors of production
  except labor are fixed, i.e., they cannot change
  to increase or decrease output.

7
The Production Function

• y F (N)

y
N
8
The Production Function
y

• y F (N)

y1
N
N1
9
The Production Function
y

• y F (N)

y2
y1
N
N1
N2
10
Increase in The Production Function (higher
capital)
y
y2
y1
y2
y1
N
N1
N2
11
The Production Function
?
y

• y F (N)

y2
y1
N
12
The Production Function
?
?
y

• y F (N)

N
13
Marginal Product of labor

• MPN

W?
W?
MPN
N
N1
N2