Transcript O`Sullivan Sheffrin Peres 6e

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
1 of 23
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
2 of 23
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
6/e.
O’Sullivan, Sheffrin, Perez
Economics: Principles, Applications, and Tools
The Economy at
Full Employment
Immigration is an important
part of the U.S. economy
today.
PREPARED BY
FERNANDO QUIJANO, YVONN QUIJANO,
AND XIAO XUAN XU
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
3 of 23
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
APPLYING THE CONCEPTS
1
Although we normally think that increased immigration
will reduce wages, what factors could cause it to raise
wages?
Immigration Affects Both the Demand and the
Supply for Labor
2
How can changes in the supply of labor affect real
wages?
The Black Death and Living Standards in Old
England
3
Do differences in taxes and government benefits
explain why Europeans work substantially fewer hours
per year than do U.S. workers or the Japanese?
A Nobel Laureate Explains Why Europeans Work
Less Than U.S. Workers or the Japanese
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4 of 24
7.1
WAGE AND PRICE FLEXIBILITY
AND FULL EMPLOYMENT
● classical models
Economic models that assume wages and
prices adjust freely to changes in demand and
supply.
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
5 of 24
7.2
THE PRODUCTION FUNCTION
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
• production function
The relationship between the level of output of a
good and the factors of production that are inputs
to production.
• stock of capital
The total of all machines, equipment, and buildings
in an entire economy.
• labor
Human effort, including both physical and mental
effort, used to produce goods and services.
When there are only two factors of production,
capital and labor, the production function is written
as follows:
Y = F(K,L)
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
6 of 24
7.2
THE PRODUCTION FUNCTION
 FIGURE 7.1
The Relationship between
Labor and Output with Fixed
Capital
With capital fixed, output
increases with labor input,
but at a decreasing rate.
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
7 of 24
7.2
THE PRODUCTION FUNCTION
PRINCIPLE OF DIMINISHING RETURNS
Suppose output is produced with two or more inputs, and we increase one
input while holding the other input or inputs fixed. Beyond some point—called
the point of diminishing returns—output will increase at a decreasing rate.
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
8 of 24
7.2
THE PRODUCTION FUNCTION
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
 FIGURE 7.2
An Increase in the Stock of
Capital
When the capital increases
from K1 to K2, the production
function shifts up.
At any level of labor input,
the level of output increases.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
9 of 24
7.3
WAGES AND THE DEMAND AND
SUPPLY FOR LABOR
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
 FIGURE 7.3
The Demand and Supply of Labor
Together, the demand and supply for labor determine the level of employment and the real wage.
• real wage
The wage rate paid to employees adjusted for changes
in the price level.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
10 of 24
7.3
WAGES AND THE DEMAND AND
SUPPLY FOR LABOR
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
Labor Market Equilibrium
Panel C of Figure 7.3 puts the demand and
supply curves together.
At a wage of $15 per hour, the amount of
labor firms want to hire—7,500 workers—will
be equal to the number of people who want to
work—7,500 workers.
This is the labor market equilibrium: The
quantity demanded for labor equals the
quantity supplied.
Together, the demand and supply curves
determine the level of employment in the
economy and the level of real wages.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
11 of 24
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
7.3
WAGES AND THE DEMAND AND
SUPPLY FOR LABOR
Changes in Demand and Supply
MARGINAL PRINCIPLE
Increase the level of an activity as long as its marginal benefit exceeds its
marginal cost. Choose the level at which the marginal benefit equals the
marginal cost.
 FIGURE 7.4
Shifts in Labor
Demand and Supply
Shifts to demand and
supply will change
both real wages and
employment.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
12 of 24
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
APPLICATION
1
IMMIGRATION AFFECTS BOTH THE DEMAND AND
THE SUPPLY FOR LABOR
APPLYING THE CONCEPTS #1: Although we normally think
that increased immigration will reduce wages,
what factors could cause it to raise wages?
A recent study by Gianmarco Ottaviano of the
University of Bologna and Giovanni Peri of the
University of California, Davis, estimated that
during the 1990s immigration, on average, increased
the average wage of U.S.-born workers by 2.7 percent.
They took into account that increased immigration led to increases in the
supply of labor and additional investment, and as a result, both the demand
and the supply for labor shifted, with the shift in demand slightly outpacing
the shift in supply.
When they looked more closely at wages, they found the wages of highschool dropouts fell, while wages of workers with at least a high-school
education increased. The reason for this difference was that high-school
dropouts compete most directly with the new immigrants, whereas those
workers with more education do not.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
13 of 24
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
APPLICATION
2
THE BLACK DEATH AND LIVING STANDARDS IN OLD ENGLAND
APPLYING THE CONCEPTS #2: How can changes in the supply of
labor affect real wages?
According to the research of Professor Gregory Clark of
the University of California, Davis, the level of real wages
for laborers in England was nearly the same in 1200 as it
was in 1800. Yet, during the period from 1350 to 1550,
wages were considerably higher—nearly 75 percent higher
in 1450, for instance, than they were in 1200.
Why were real wages temporarily so high during this period?
The simple answer was the bubonic plague—also known as the Black Death—
that arrived from Asia in 1348 and caused a long decline in total population
through the 1450s. With fewer workers, there was less labor supplied to the
market. The result was higher real wages, although less total output.
In the era before consistent and rapid technological advance, changes in
population was the primary factor controlling living standards. As the
economist Thomas Malthus (1766–1834) observed, social maladies such as
the Black Death would temporarily raise living standards until higher living
standards led to increased population.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
14 of 24
7.4
LABOR MARKET EQUILIBRIUM AND FULL
EMPLOYMENT
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
 FIGURE 7.5
Determining Full-Employment
Output
Panel B determines the
equilibrium level of employment
at L and the real wage rate of
W. Full-employment output
in Panel A is Y.
• full-employment output
The level of output that results
when the labor market is in
equilibrium and the economy
is producing at full
employment.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
15 of 24
7.5
USING THE FULL-EMPLOYMENT MODEL
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
Taxes and Potential Output
 FIGURE 7.6
How Employment Taxes
Affect Labor Demand and
Supply
In Panel A, a tax burden on
labor shifts the labor
demand curve to the left
and leads to lower wages
and reduced employment.
In Panel B, the supply
curve for labor is vertical,
which means that wages
fall but employment does
not change.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
16 of 24
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
APPLICATION
3
A NOBEL LAUREATE EXPLAINS WHY EUROPEANS WORK
LESS THAN AMERICANS OR THE JAPANESE
APPLYING THE CONCEPTS #3: Do differences in taxes and
government benefits explain why Europeans work substantially
fewer hours per year than do U.S. workers or the Japanese?
On average today, the French (and other Europeans) work one-third fewer hours
than do U.S. workers. In the early 1970s Europeans actually worked slightly more
hours than did U.S. workers.
What explains this dramatic turnaround in the space of just 20 years?
Nobel-laureate Edward Prescott of the Federal Reserve Bank of Minneapolis and
Arizona State University attributes the decreases in hours of work in Europe to:
• Increases in the tax burden that ultimately falls on workers.
• Government spending and transfers play a larger role in European
economies than in the United States.
Prescott notes that as the burdens of Social Security and Medicare increase, the
United States may be tempted to increase its tax rates to European levels.
What will happen if we do not make changes in the underlying programs and allow
tax rates to increase?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
17 of 24
7.5
USING THE FULL-EMPLOYMENT MODEL
6/e. Perez
PerezSheffrin,
O’Sullivan,
and Tools Sheffrin,
Tools O’Sullivan,
Applications,
Principles,and
Economics: Principles
6/e.
CHAPTER 7
The Economy at
Full Employment
Real Business Cycle Theory
• real business cycle theory
The economic theory that emphasizes how shocks to
technology can cause fluctuations in economic activity.
 FIGURE 7.7
How an Adverse
Technology Shock Affects
Labor Demand and Supply
An adverse shock to
technology will decrease
the demand for labor.
As a result, both real
wages and employment fall
as the market equilibrium
moves from a to b.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
18 of 24
7.6
DIVIDING OUTPUT AMONG COMPETING
DEMANDS FOR GDP AT FULL EMPLOYMENT
6/e. Perez
PerezSheffrin,
O’Sullivan,
and Tools Sheffrin,
Tools O’Sullivan,
Applications,
Principles,and
Economics: Principles
6/e.
CHAPTER 7
The Economy at
Full Employment
International Comparisons
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
19 of 24
7.6
DIVIDING OUTPUT AMONG COMPETING
DEMANDS FOR GDP AT FULL EMPLOYMENT
6/e. Perez
PerezSheffrin,
O’Sullivan,
and Tools Sheffrin,
Tools O’Sullivan,
Applications,
Principles,and
Economics: Principles
6/e.
CHAPTER 7
The Economy at
Full Employment
Crowding Out in a Closed Economy
• crowding out
The reduction in investment (or other component of
GDP) caused by an increase in government spending.
P R I N C I P L E O F O P P O RT U N I T Y C O S T
The opportunity cost of something is what you sacrifice to get it.
• closed economy
An economy without international trade.
output = consumption + investment + government purchases
Y=C+I+G
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
20 of 24
7.6
DIVIDING OUTPUT AMONG COMPETING
DEMANDS FOR GDP AT FULL EMPLOYMENT
6/e. Perez
PerezSheffrin,
O’Sullivan,
and Tools Sheffrin,
Tools O’Sullivan,
Applications,
Principles,and
Economics: Principles
6/e.
CHAPTER 7
The Economy at
Full Employment
Crowding Out in a Closed Economy
 FIGURE 7.8
U.S. Consumption and
Government Spending
During World War II
Increased government
spending crowds out
consumption by
consumers.
The vertical bar highlights
the time period during
which crowding out
occurred.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
21 of 24
7.6
DIVIDING OUTPUT AMONG COMPETING
DEMANDS FOR GDP AT FULL EMPLOYMENT
6/e. Perez
PerezSheffrin,
O’Sullivan,
and Tools Sheffrin,
Tools O’Sullivan,
Applications,
Principles,and
Economics: Principles
6/e.
CHAPTER 7
The Economy at
Full Employment
Crowding Out in a Closed Economy
 FIGURE 7.9
U.S. Investment and
Government Spending
During World War II
Increased government
spending also crowds out
private investment
spending.
The vertical bar highlights
the time period during
which crowding out
occurred.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
22 of 24
7.6
DIVIDING OUTPUT AMONG COMPETING
DEMANDS FOR GDP AT FULL EMPLOYMENT
6/e. Perez
PerezSheffrin,
O’Sullivan,
and Tools Sheffrin,
Tools O’Sullivan,
Applications,
Principles,and
Economics: Principles
6/e.
CHAPTER 7
The Economy at
Full Employment
Crowding Out in an Open Economy
• open economy
An economy with international trade.
Y = C + I + G + NX
Increased government spending need not crowd out either consumption or
investment. It could lead to reduced exports and increased imports.
Crowding in
• crowding in
The increase of investment (or other
component of GDP) caused by a
decrease in government spending.
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
23 of 24
KEY TERMS
Economics: Principles, Applications, and Tools
O’Sullivan, Sheffrin, Perez
6/e.
CHAPTER 7
The Economy at
Full Employment
classical models
full-employment output
closed economy
labor
crowding in
open economy
crowding out
production function
real business cycle theory
real wage
stock of capital
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
24 of 24