Definition Sheet - K=capital: tools, machines, and structures used in production - L=labor: the physical and mental efforts of workers - The production function: denoted Y = F(K,L), shows how much output (Y) the economy can produce from K units of capital and L units of labor - Marginal Product of Labor (MPL): the extra output the firm can produce using an additional unit of labor (holding other inputs fixed): MPL = F(K,L+1)– F(K,L)- Law of Diminishing Returns: As the number of units of the variable input (cooks) increases, other inputs (space and equipment) held constant; there exists a point beyond which the marginal product of the variable input declines – this is the law of diminishing returns (marginal products) - Diminishing Marginal Returns: As a factor input is increased, its marginal product falls (holding other factor inputs equal) - Factor Prices: the prices per unit that firms pay for the factors of production- Rental Rate: We assume firms rent capital (structures and machines) from households in the factors market - Demand Curve: the relationship between the price and quantity of labor (demanded) - Marginal Product Curve: the relationship between the marginal product andquantity of labor - Cobb-Douglas Production Function: Y = AKαL1-α where A represents the level of technology - Disposable Income: total income minus total taxes: Y – T - Consumption Function: C = C(Y-T) shows that increase in (Y-T) = increase in C - Marginal Propensity to Consume (MPC): the increase in C caused by a one-unit increase in disposable income - Real interest rate: the cost of borrowing and the opportunity cost of using one’s own funds to finance investment spending - Private Saving: (Y-T) – C - Public Saving: T – G - National Saving: S = private saving + public saving = Y – C – G- Constant Returns to Scale: A property of a production function whereby a proportionate increase in all factors of production leads to an increase in the output of the same proportion- Competition: A situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices - Profit: The income of firm owners; firm revenue minus firm costs (Cf. accounting profit, economic profit)- Real wage: wages that have been adjusted for inflation, or equivalently, wages in terms of the amount of goods and services that can be bought- Marginal Product of Capital (MPK): the amount of extra output produced when the capital input is increased by one unit - Real rental Price of Capital: the amount paid to rent one unit of capital- Economic Profit: the amount of revenue remaining for the owners of a firm after all the factors of production have been compensated (Cf. accounting profit, profit)- Accounting Profit: The amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated (Cf. economic profit, profit) - Interest Rate: The market price at which resources are transferred between the present and the future; the return to saving and the cost of borrowing- Nominal Interest Rate: The return to saving and the cost of borrowing without adjustment for inflation (Cf. real interest rate) - Loanable Funds: the flow of resources available to finance capital accumulation - Crowding Out: the reduction in investment that results when expansionary fiscal policy raises the interest
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