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Intermediate Macroeconomics


2. Production and Labor Market Equilibrium


In the last section (consumption and leisure choices), we developed a model of consumer optimal behavior that led to a labor supply curve. The goal of this section is to develop a model of optimal producer behavior to determine labor demand. By optimal producer behavior, we mean that businesses choose how much labor to hire to maximize profits. We begin this section with the production function, which is a mathematical and graphical function which shows how different quantities of labor and capital determine the level of output for the producer. Also similar to the previous section, we consider a single producer, but imagine it is a representative producer, so that its production decisions coincide with the aggregate level of production.


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Introduction to Production Functions

Production functions show graphically and mathematically how quantities of labor and capital map to quantity of output produced. In this Pencast, introduce the idea of the production function and discuss some key assumptions regarding it. This concepts will be useful when discussing optimal (i.e. profit-maximizing) firm behavior. [Play Pencast]


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Shape and Shifts in Production Functions

In this pencast we discuss the shape of the production function, the economic meaning behind the slope, and what causes the production function to shift. [Play Pencast]


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Increasing Capital Stock in Production Functions

In this pencast we demonstrate the effect that increases in capital have on production and the production function. Whether we model this as a shift in the production function or a movement along the curve depends on whether we illustrate the production function with labor on the horizontal axis (shift) or capital on the horizontal axis (movement). [Play Pencast]


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Profit Maximization with Production Functions

In this pencast we use the production function to explore firm's profits, and locate the quantity of employment that maximizes profits. [Play Pencast]


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Profit Maximizing Labor Demand

In this pencast we use the profit maximizing strategy discussed in the previous Pencast to derive a demand curve for labor. [Play Pencast]


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General Equilbrium

In this pencast we combine utility maximizing consumer behavior with profit maximizing producer behavior and derive and illustrate the equilibrium in the labor market. [Play Pencast]


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Socially Optimal Outcome

We take a different perspective in this Pencast than previous Pencasts. Rather than identifying decisions that are best for consumers (utility maximizing) and producers (profit maximizing), we identify instead the quantity of labor/leisure and production/consumption that is socially optimal. We derive a graphical and mathematical condition for how soceity should best use its resources to maximize the utility for its people. We find that this condition is equivalent to the selfishly optimal conditions from the perfectly competitive equilibrium (utility maximing and profit maximizing), which leads us to the conclusion that the competitive equilibrium is socially optimal. [Play Pencast]


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Improvement in Technology

In this Pencast we look at the general equilibrium effects from an improvement in technology. Because we know that the competitive equilibrium is socially optimal, we analyze the effect of an improvement in technology from the perspective of the socially optimal outcome. We identify the effects on consumption, labor/leisure, wage, and consumer utility. [Play Pencast]


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Change in Government Spending

In this Pencast we look at the general equilibrium effects from a change in government spending. Because we know that the competitive equilibrium is socially optimal, we analyze the effect from the change in government spending from the perspective of the socially optimal outcome. We identify the effects on consumption, labor/leisure, wage, and consumer utility. [Play Pencast]


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