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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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Chapter 4

The Theory of Aggregate Supply


The Production Function

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

©1999 South-Western College Publishing


Maximizing Profits

YS

3

2

Y (Output Supplied)

1

LD

0

L (Quantity of Labor demanded)

Figure 4.2

©1999 South-Western College Publishing


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

©1999 South-Western College Publishing


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

©1999 South-Western College Publishing


LD

LD

B

A

Deriving the Investment Demand Curve

Panel C

A

(Real wage)

B

LD (Quantity of Labor demanded)

Figure 4.3C

©1999 South-Western College Publishing


©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

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

©1999 South-Western College Publishing


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

©1999 South-Western College Publishing


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

©1999 South-Western College Publishing


2,200

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

©1999 South-Western College Publishing


1900

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

©1999 South-Western College Publishing


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

©1999 South-Western College Publishing


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

©1999 South-Western College Publishing


The Effect of a New Invention on the Labor Market

Labor supply

E2

 (Real wage)

E1

Labor demand2

Labor demand1

LE1

LE2

L (Quantity of labor demanded and supplied)

Figure 4.7

©1999 South-Western College Publishing


The Effect of a Change in Tastes on Employment and Output

YE2

Production function

Y (Aggregate supply of commodities)

YE1

LE1

LE2

Employment

Figure 4.8A

©1999 South-Western College Publishing


The Effect of a Change in Tastes on Employment and Output

Labor supply1

Labor supply2

E1

E2

 (Real wage)

Labor demand

LE1

LE2

L (Quantity of labor demanded and supplied)

Figure 4.8B

©1999 South-Western College Publishing



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