Econ 102 1st Edition Lecture 7 - Outline of Last Lecture I. Inflation Since the Industrial RevolutionII. Cost of Living Adjustment (COLA)III. Who Cares about Inflation?IV. The Costs of InflationV. Chapter 7: The classical equilibrium model of labor and ProductionOutline of Current LectureI. 7.3 Wages and the Demand and Supply of laborII. Graph One: Production FunctionIII. Graph Two: Real WagesIV.Graph Three: Wr x LaborV. Graph Four: Labor Supply and Labor DemandVI.Graph Six: Real GDP x Labor, leads up to Graph Five: Real GDP x LaborCurrent LectureI. Professor Eudey recommended we put away our laptops and take today’s lecture notes on paper due to graph drawinga. Exam One will be Chapter 5 through the first half of Chapter 8b. There are three practice Exams on Learn @ UWII. Graph One: Production Functiona. Y- axis: The Real GDPb. X-axis: Labori. # hours works x the number of workersc. Curve: Y= F(k,L)d. First assumption: Assume diminishing returnsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. the change from Y1 to Y2 is smaller than Y0 to Y1ii. Mpl falls as labor increases (thus a diminishing return in Labor)iii.*This is an assumption for this chapter- we know diminishing returns do not always occur (from Econ 101)iv.(Page 1- first half)III. Graph Two: Real Wagesa. MPL is the first derivative of the Production Function equationb. Second assumption: assume perfect competition in the labor marketi. On average the data seems to reflect thisii. Marginal Cost = Marginal Benefit1. The marginal cost is the wage2. The marginal benefit is the marginal revenue earned by hiring a new workera. mpl x Pi. P: price of product produced by worker1. Ex: price of a haircut iii.Wage/ Price level = Real Wage =mpl iv.therefore Mpl can be replaced with Real Wage (Wr)v. Allows the comparison of wages and more1. across time periods2. across countriesc. (Page 1-second half)d. These two assumptions derive the maximum Wr a firm is willing to pay for labor (L)IV. Graph Three: Wr x Labora. (page 2-first half)b. Labor Supplyi. assume diminishing returns to utility from leisure (non-worktime)ii. At low levels of employment (Labor or work) you have lots of leisure (low marginal utility)1. Willing to work for Wr1 at L12. Work at L2 needs to be paid more to give up m ore leisure timea. becomes more valuablec. ** Always label graph’s axis- worth points on the exam!d. Upward sloping because workers need to be paid more to give upmore valuable timei. Ex: loss of sleepii. however this is a wage where people will give up sleep entirelyV. Graph Four: Labor supply and Labor Demanda. (Page two-second half)b. Graph Four Labor supply curve and Labor demand curve c. where they intersect forms L1 * and Y1 *d. leads up to make Graph Five demonstrating the real GDP: Y1*e. Now let’s Play with Graph four- Population increase (blue)i. If the population increases1. due to immigration, better health, lower mortality rate,etc)2. There is no shift in the Labor demand curve3. Labor supply shifts righta. regardless of wageb. Wr* decreases = mpl decreases and Labor increasesc. Result of perfect competition and diminishing returnsd. Per capita GDP is fallinge. Economics is known as “dismal science” because all changes in Labor* used to be caused by shifts in Labor supplyi. it was historically bad for the population to increases1. children would have to compete against each other as they got olderVI.Graph Six: Real Wages paid x Labor and Graph Five: Real GDP x Labora. Very high probability of these graphs being the free response questions on the examb. Labor supply curve and Labor demand curve c. where they intersect forms L1 * and Wr *d. leads up to make Graph Five demonstrating the real GDP: Y1*e. Now Suppose a Payroll Tax is imposed (green)i. payroll tax imposed = T ii. Real wages paid - T= real wages earnediii.a wedge forms between the Real wages paid and the Real Wages earned 1. (Page 3)2. The government takes the difference3. The firm hires less employees because they have to pay more for them4. workers are earning lessa. Labor force participation falls as Real wagesb. earned decreases5. (page 3)6. This gives us the L2 x-intercept point7. which leads up to graph 5 to form a new GDP, Y28. Taxes distort Labor and GDP- depending on the slope of the Labor supply
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