Lecture 3 National Income

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Lecture 3National Income

• Supply side
• factor markets (supply, demand, price)
• determination of output/income
• Demand side
• determinants of C, I, and G
• Equilibrium
• goods market
• loanable funds market

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Lecture 3. National Income
A basic classical model

• the determinants of the level of output (income)
• how income is distributed
• how output is allocated among alternative uses
• what ensures that the supply of and demand for
  goods are equal

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Lecture 3. National Income
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Lecture 3. National Income

• What Determines the Total Production of Goods and
  Services?
• The Factors of Production
• K capital tools, machines, and
  structures used in production
• L labor the physical and mental efforts
  of workers
• The Production Function Y F(K,L)
• shows how much output (Y ) the economy can
  produce from K units of capital and L units of
  labor
• reflects the economys level of technology
• exhibits constant returns to scale
• The Supply of Goods and Services

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Lecture 3. National Income
Returns to scale A review

• Initially Y1 F (K1 , L1 )
• Scale all inputs by the same factor z
• K2 zK1 and L2 zL1
• (e.g., if z 1.2, then all inputs are increased
  by 20)
• What happens to output, Y2 F (K2, L2 )?
• If constant returns to scale, Y2 zY1
• If increasing returns to scale, Y2 gt zY1
• If decreasing returns to scale, Y2 lt zY1

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Lecture 3. National Income
Production function
Output (Y)
0
Capital (K)
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Lecture 3. National Income
Slope. Marginal product of capital (gt0)
Output-labourratio (yY/L)
0
Capital-labour ratio(kK/L)
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Lecture 3. National Income
Curve. Diminishing marginal productivity
Output-labourratio (yY/L)
0
Capital-labour ratio(kK/L)
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Lecture 3. National Income
Shift. Changes in productivity
Output-labourratio (yY/L)
0
Capital-labour ratio(kK/L)
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Lecture 3. National Income

• The Distribution of National Income to the
  Factors of Production
• Factor Prices
• The Decisions Facing the Competitive Firm
• The Firms Demand for Factors
• The Division of National Income

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Lecture 3. National Income
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Lecture 3. National Income
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Lecture 3. National Income
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Lecture 3. National Income
Production Function Yf(K,L)
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Lecture 3. National Income
The CobbDouglas Production Function

• The Cobb-Douglas production function has constant
  factor shares
• ? capitals share of total income
• capital income MPK x K ? Y
• labor income MPL x L (1 ? )Y
• The Cobb-Douglas production function is
• where A represents the level of technology.

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Lecture 3. National Income
Demand for Goods and Services

• Consumption
• Investment
• Government Purchases

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Lecture 3. National Income
The Consumption Function
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Lecture 3. National Income
The Investment Function
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Lecture 3. National Income
What Brings the Supply and Demand for Goods and
Services Into Equilibrium?

• Equilibrium in the Market for Goods and Services
• Demand for gs
• Supply of gs
• Equilibrium in the Financial Markets

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Lecture 3. National Income
Saving, Investment, and the Interest Rate
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Lecture 3. National Income
A Reduction in Saving
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Lecture 3. National Income
Wars and Interest Rates in the UK
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Lecture 3. National Income
An Increase in the Demand for Investment
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Lecture 3. National Income
An Increase in Investment Demand When Saving
Depends on the Interest Rate
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Lecture 3. National Income
Student Presentations Due February 24th at the
end of the lecture 1st topic GDP in
Azerbaijan 2nd topic Inflation and Unemployment
in Azerbaijan