Chapter 4 Theory of Aggregate Supply The Production

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Chapter 4 Theory of Aggregate Supply

Chapter 4 Theory of Aggregate Supply

The Production Function Y (Amount of unique commodity produced) The boundary of this area

The Production Function Y (Amount of unique commodity produced) The boundary of this area is called the production function. Figure 4. 1 Y 1 L 1 0 Time spent at work L (Labor) Time spent at leisure B 2 © 1999 South-Western College Publishing

Y (Output Supplied) Maximizing Profits YS 3 2 1 0 LD L (Quantity of

Y (Output Supplied) Maximizing Profits YS 3 2 1 0 LD L (Quantity of Labor demanded) Figure 4. 2 3 © 1999 South-Western College Publishing

Y (Quantity of output Supplied) Deriving the Investment Demand Curve Panel A YAS A

Y (Quantity of output Supplied) Deriving the Investment Demand Curve Panel A YAS A LD 0 A LD (Quantity of Labor demanded) Figure 4. 3 A 4 © 1999 South-Western College Publishing

Y (Quantity of output Supplied) Deriving the Investment Demand Curve Panel B YBS B

Y (Quantity of output Supplied) Deriving the Investment Demand Curve Panel B YBS B LD 0 B LD (Quantity of Labor demanded) Figure 4. 3 B 5 © 1999 South-Western College Publishing

(Real wage) Deriving the Investment Demand Curve Panel C A B LAD Figure

(Real wage) Deriving the Investment Demand Curve Panel C A B LAD Figure 4. 3 C LBD LD (Quantity of Labor demanded) 6 © 1999 South-Western College Publishing

YD (Commodities demanded) © 1999 South-Western College Publishing Maximizing Utility The same line that

YD (Commodities demanded) © 1999 South-Western College Publishing Maximizing Utility The same line that represents the iso-profit line of the firm also represents the budget constraint of the family. The slope of this line is the real wage rate YD 2 (Profit of the firm) Figure 4. 4 U 3 U 2 In its role as a household the family chooses the highest indifference curve that is tangent to the budget constraint U 1 LS LS (Quantity of labor supplied) 7

YD (Q of commodities demanded) The Labor Supply Curve Panel A Slope A YAD

YD (Q of commodities demanded) The Labor Supply Curve Panel A Slope A YAD Figure 4. 5 A LS (Quantity of labor supplied) 8 © 1999 South-Western College Publishing

YD (Q of commodities demanded) Figure 4. 5 B The Labor Supply Curve Panel

YD (Q of commodities demanded) Figure 4. 5 B The Labor Supply Curve Panel B Slope B YD B LS (Quantity of labor supplied) 9 © 1999 South-Western College Publishing

(Real wage) The Labor Supply Curve Panel C B Labor supply curve A

(Real wage) The Labor Supply Curve Panel C B Labor supply curve A LAS LBS LD (Quantity of labor supplied) Figure 4. 5 C 10 © 1999 South-Western College Publishing

Hours worked 2, 200 2, 100 2, 000 1, 900 1, 800 1, 700

Hours worked 2, 200 2, 100 2, 000 1, 900 1, 800 1, 700 1, 600 1, 500 Box 4. 1 A Average Work Habits in Three Countries U. S. Britain Country 1975 1995 Germany 11 © 1999 South-Western College Publishing

45 40 35 30 25 20 10 Time 1900 1920 1940 1960 1987 dollars

45 40 35 30 25 20 10 Time 1900 1920 1940 1960 1987 dollars per year (in thousands) Percentage of population Box 4. 1 B 40 30 20 1980 Number unemployed as a percentage of U. S. population Real wage in thousands of 1987 dollars per year 12 © 1999 South-Western College Publishing

(Real wage) Labor Market Equilibrium Labor supply 1 E Labor demand 2 LS

(Real wage) Labor Market Equilibrium Labor supply 1 E Labor demand 2 LS LD 2 1 LE LS 1 LD 2 L (Quantities of labor demanded and supplied) Figure 4. 6 13 © 1999 South-Western College Publishing

Y (Aggregate supply of commodities) The Effect of a New Invention on the Labor

Y (Aggregate supply of commodities) The Effect of a New Invention on the Labor Market Production function 2 YE 2 Production function 1 YE 1 Figure 4. 7 LE 1 LE 2 Employment 14 © 1999 South-Western College Publishing

(Real wage) E 2 The Effect of a New Invention on the Labor

(Real wage) E 2 The Effect of a New Invention on the Labor Market Labor supply E 1 Labor demand 2 LE 1 LE 2 L (Quantity of labor demanded and supplied) Figure 4. 7 15 © 1999 South-Western College Publishing

Y (Aggregate supply of commodities) The Effect of a Change in Tastes on Employment

Y (Aggregate supply of commodities) The Effect of a Change in Tastes on Employment and Output Production function YE 2 YE 1 Figure 4. 8 A LE 1 LE 2 Employment 16 © 1999 South-Western College Publishing

(Real wage) The Effect of a Change in Tastes on Employment and Output

(Real wage) The Effect of a Change in Tastes on Employment and Output Labor supply 1 Labor supply E 1 2 E 2 Labor demand LE 1 LE 2 L (Quantity of labor demanded and supplied) Figure 4. 8 B 17 © 1999 South-Western College Publishing

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