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Chapter 3: National Income
Terms in this set (43)
Factors of Production
Inputs used to produce goods and services
Y=F(K,L) - Output is a function of the amount of capital and amount of labor
Constant returns to scale
An increase of equal percentage in all factors of production causes an increase in output of the same percentage
Amounts paid to each unit of the factors of production
Firm that is small relative to markets in which it trades, so it has little influence on market prices
=Revenue - Labor Costs- Capital Costs
Marginal Product of labor (MPL)
Extra amount of output the firm gets from one extra unit of labor, holding amount of capital fixed
Diminishing marginal product
Holding amount of capital fixed, marginal product of labor decreases as amount of labor increases
Payment to labor measured in units of output rather than in dollars
Marginal Product of Capital (MPK)
Amount of extra output the firm gets from an extra unit of capital, holding amount of labor constant
MPK = F(K+1, L)-F(K,L)
Real rental price of capital
Rental price measured in units of goods rather than in dollars
Income that remains after the firms have paid the factors of production
Economic Profit + (MPK x K)
Cobb-Douglas Production function
f(K, L) = A K^ą L^(1-ą) where A is a parameter greater than zero that measures the productivity of the available technology & where ą is a constant between zero and one that measures capital's share of income.
Income after payment of all taxes (Y-T)
Relationship between consumption and disposable income
Marginal Propensity to consume
Amount by which consumption changes when disposable income increases by one dollar
Quantity of investment goods demanded depends on the ______
Nominal Interest Rate
Interest rate as usually reported; rate of interest investors pay to borrow money
Real interest rate
Nominal interest rate corrected for effects of inflation
National Saving (saving)
Output that remains after the demands of consumers and government have been satisfied (Y-C-G=I)
Disposable income minus consumption (Y-T-C)
Government revenue minus government spending (T-G)
Saving is supply of ____, and "price" is interest rate.
Government purchases ______ investment
Gross domestic Product: An economy's output of goods and services
neo-classical theory of distribution
Idea that prices adjust to balance supply and demand, and demand for each factor of production depends on marginal productivity of that factor
At any particular point in time, the output of the economy
is fixed because the supplies of capital and labor and the technology are fixed.
According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their
A competitive, profit-maximizing firm hires labor until the
price of output multiplied by the marginal product of labor equals the wage
If Y = AK^0.5L^0.5 and A, K, and L are all 100, the marginal product of capital is
Marginal Product of Capital
First Derivative of production function with respect to K
In a Cobb-Douglas production function the marginal product of labor will increase if
the quantity of labor increases
According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly
workers will experience high rates of real wage growth
Other things equal, an increase in the interest rate leads to:
a decrease in the quantity of investment goods demanded
The equation may be solved for the equilibrium level of
The interest rate
National saving refers to
income minus consumption minus government spending
If saving exceeds investment demand, and consumption is not a function of the interest rate
the interest rate will fall.
According to the model developed in Chapter 3, when government spending increases without a change in taxes
In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______.
increases; does not change
When government spending increases and taxes are increased by an equal amount, interest rates
Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given income. This shift, in a neoclassical economy, will
lower investment and raise the interest rate.
If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals
A patent gives a single person or firm the exclusive right to sell some good or service for a specific period of time.
Within the context of the circular flow of income diagram, which group of market participants demands factors of production?
what happens if the quantity demanded is not very responsive to a change in the price?
market economy in which privately owned businesses have the freedom to operate for a profit with limited government intervention, same as private enterprise economy
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