Macroeconomics Chapter 3

Production Function

The relationship that shows the amount of output produced with given quantities of capital and labor.

Supply Shock

A shift in the production function, indicating a change in the output possible with given capital and labor.

Marginal Product of Capital (MPK)

The extra output produced when the capital stock increases by one unit, holding labor constant.

Diminishing Marginal Productivity of Capital

The principle that MPK falls as capital stock increases.

Marginal Product of Labor (MPN)

The extra output produced when labor increases by one unit, holding capital constant.

Marginal Revenue Product of Labor (MRPN)

The additional revenue generated from employing one more unit of labor.

Labor Demand Curve

A curve that reflects the relationship between real wage and the quantity of labor demanded, which slopes downward.

Aggregate Labor Demand

The total demand for labor in the economy, summed from all firms.

Opportunity Cost of Labor Supply

The comparison of additional real income earned against the loss of leisure when increasing labor supply.

Substitution Effect

The effect of a higher real wage that increases labor supply due to higher rewards for working.

Income Effect

The reduction in labor supply due to higher wages making workers wealthier and able to afford more leisure.

Labor Supply Curve

The relationship showing how the amount of labor supplied changes with current real wages, which slopes upward.

Full-Employment Level of Employment

The equilibrium level of employment when wages and prices fully adjust.

Potential Output

The maximum output produced when employment is at its full-employment level.

Unemployment Rate

The fraction of the labor force that is unemployed.

Labor Force

The total number of employed and unemployed individuals who are actively looking for work.

Factors Shifting the Labor Demand Curve

Changes like supply shocks or capital stock increases that shift the demand curve to the right.

Factors Shifting the Labor Supply Curve

Changes like an increase in wealth or expected future real wage that shift the supply curve to the left.

Frictional Unemployment

in-between jobs

Structural Unemployment

occurs when there is a mismatch between the skills of the workforce and the needs of employers, often due to technological changes or shifts in the economy.

cyclical unemployment

unemployment due to recession

Okun’s Law

a 1 percentage point increase in the rate of cyclical unemployment reduces output by 2%.

adverse supply shock

occurs when sudden events cause a significant decrease in supply, leading to higher prices and lower output.

beneficial supply shock

occurs when unexpected events lead to an increase in supply, resulting in lower prices and higher output.

employment ratio

proportion of WAP that is employed, indicating the health of the labor market.

factors of production

resources used to produce g/s, including land, labor, capital, and entrepreneurship.