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# The Theory of Aggregate Supply - PowerPoint PPT Presentation

Chapter 4. The Theory of Aggregate Supply. The Production Function . The boundary of this area is called the production function. Y 1. Y (Amount of unique commodity produced). L 1. B. 0. Time spent at work. Time spent at leisure. L (Labor). Figure 4.1.

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The Theory of Aggregate Supply

The boundary of this area is called the production function.

Y1

Y (Amount of unique commodity produced)

L1

B

0

Time spent at work

Time spent at leisure

L (Labor)

Figure 4.1

YS

3

2

Y (Output Supplied)

1

LD

0

L (Quantity of Labor demanded)

Figure 4.2

YS

A

LD

A

Deriving the Investment Demand Curve

Panel A

Y (Quantity of output Supplied)

A

0

LD (Quantity of Labor demanded)

Figure 4.3A

YS

B

LD

B

Deriving the Investment Demand Curve

Panel B

Y (Quantity of output Supplied)

B

0

LD (Quantity of Labor demanded)

Figure 4.3B

LD

LD

B

A

Deriving the Investment Demand Curve

Panel C

A

(Real wage)

B

LD (Quantity of Labor demanded)

Figure 4.3C

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

U3

YD (Commodities demanded)

YD

U2

2

In its role as a household the family chooses the highest indifference curve that is tangent to the budget constraint

U1

(Profit of the firm)

LS

LS (Quantity of labor supplied)

Figure 4.4

LS

A

The Labor Supply Curve

Panel A

Slope

A

YD

A

YD(Q of commodities demanded)

LS (Quantity of labor supplied)

Figure 4.5A

YD

LS

B

B

The Labor Supply Curve

Panel B

Slope

B

YD (Q of commodities demanded)

LS (Quantity of labor supplied)

Figure 4.5B

LS

B

LS

A

The Labor Supply Curve

Panel C

B

Labor supply curve

 (Real wage)

A

LD (Quantity of labor supplied)

Figure 4.5C

2,100

2,000

1,900

1,800

1,700

1,600

1,500

1975

1995

Average Work Habits in Three Countries

Hours worked

U. S.

Britain

Germany

Country

Box 4.1A

1920

1940

1960

1980

Number unemployed as a percentage of U.S. population

Real wage in thousands of 1987 dollars per year

40

30

20

10

1987 dollars per year (in thousands)

Percentage of population

45

40

35

30

Time

25

20

Box 4.1B

LD

LS

LD

LS

1

1

2

2

Labor Market Equilibrium

Labor supply

1

E

Labor demand

 (Real wage)

2

LE

L (Quantities of labor demanded and supplied)

Figure 4.6

YE2

LE2

The Effect of a New Invention on the Labor Market

Production function2

Production function1

Y (Aggregate supply of commodities)

YE1

LE1

Employment

Figure 4.7

Labor supply

E2

 (Real wage)

E1

Labor demand2

Labor demand1

LE1

LE2

L (Quantity of labor demanded and supplied)

Figure 4.7

YE2

Production function

Y (Aggregate supply of commodities)

YE1

LE1

LE2

Employment

Figure 4.8A

Labor supply1

Labor supply2

E1

E2

 (Real wage)

Labor demand

LE1

LE2

L (Quantity of labor demanded and supplied)

Figure 4.8B