Chapter 12 modern microeconomics
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This document provides an overview of modern macroeconomics, including the development of classical and Keynesian economic theories. It discusses the essence of classical economists and key aspects of Keynesian economics, such as the concept of equilibrium income oscillating around potential income. The document also introduces the aggregate demand and aggregate supply model and analyzes the slope and shift factors that impact the aggregate demand curve, such as the wealth effect, interest rates, international factors, and fiscal/monetary policies. It concludes with a brief discussion of the aggregate supply curve.
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Classical economists believe full employment is normal and unemployment is rare and temporary. They advocate for laissez-faire policies and argue government intervention disrupts the self-correcting market. According to Say's Law, supply creates its own demand so over- or under-production cannot occur. Classical theory assumes perfect competition, optimal resource allocation, expanding markets, and automatic investment of savings. Equilibrium in the labor market results from the inverse relationship between wages and employment matching the direct relationship between wages and labor supply. Equilibrium in the product market occurs where the direct relationship between interest rates and savings matches the inverse relationship with investment.
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The document discusses the demand for labor from the perspective of individual firms and the overall labor market. It explains that in the short-run, a firm's demand for labor (its marginal revenue product curve) depends on the marginal product of labor. In the long-run, when both capital and labor are variable, firms will substitute between the two inputs in response to wage changes. The market demand for labor is less elastic than the sum of individual firm demands, due to product price effects. The elasticity of labor demand depends on factors like the elasticity of product demand and the share of labor costs in total costs.
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Compensation theory has never been able to provide a completely satisfactory answer to what an individual is worth for performing jobs.
1. The Job
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3. The Organization, and
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These all have an impact on job pricing and the ultimate determination of an individual’s financial Compensation.
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The document discusses the Laffer Curve and the impact of income taxes on GDP and employment. It argues that eliminating income taxes could increase UK GDP by £500 billion per year and raise the rental value of land by similar amount to over £600 billion. A 50% tax on the increased rental value of land could replace all income taxes and generate £300 billion in revenues, enough to fund government services without reducing economic growth. Taxing the rental value of land avoids the negative impacts of income taxes and could allow for elimination of other taxes like business rates and stamp duty.
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2. In a perfectly competitive labor market, the equilibrium wage rate is determined by the intersection of the market supply and demand curves for labor. The demand curve shows the quantity of labor demanded at each wage rate, while the supply curve shows the quantity supplied.
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Classical economics believes that free markets are self-regulating and that government intervention harms the economy. In contrast, Keynesian economics emerged after the Great Depression to argue that markets are imperfect, unemployment and low growth can occur in equilibrium, and the government should intervene to stimulate demand when the economy is lacking growth. Keynes argued for government policies to boost consumer income and demand to promote economic growth, unlike classical economists who felt the economy would automatically adjust on its own.
1 say's law of markets
1. Say's law of markets states that supply creates its own demand and that full employment is the norm in economies.
2. The document outlines the key assumptions and implications of Say's law, including that production generates income to purchase goods, saving and investment automatically equalize, and wages adjust to maintain full employment.
3. Keynes criticized Say's law for failing to account for the possibility of overproduction and unemployment, and argued that demand does not necessarily increase with supply and that intervention may be needed to stimulate demand.
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This document provides an overview of classical economics and compares it to modern/Keynesian economics. Some key points:
- Classical economics is based on flexible prices and wages, and the belief that savings will automatically equal investment through Say's Law. It sees the economy as self-regulating in the long run.
- Modern/Keynesian economics, developed by John Maynard Keynes, recognizes situations where savings and investment are not equal in the short run. It advocates for government intervention through spending and policies to stimulate demand and pull the economy out of slumps.
- Compared to classical economics which sees little role for government spending, Keynesian economics relies on government spending as a key part of
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Classical theory of employment
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Chapter 12 modern microeconomics
- 3. From long-run to short- run Development Macroeconomists Classical Economists Keynessian Economists
- 4. The Essence of Classical Economists Keynessian Economics Equilibrium Income Oscellates •Equilibrium income •Potential income The Paradox of Frugality
- 7. Slope of The AD Curve Wealth Effect Interest Rate Effect International Effect Multiplier Effect
- 8. Shifts of the Aggregate Demand Curve Shift Factors of the Aggregate Demand Curve • Foreign Income • Expectations • The distribution of Income • Monetary and Fiscal Policies
- 10. Thank you!!! Lualhati B. Larosa BSED 311 (SocStud)