Closed Economy One Period Model

Lecture 3

what does the optimal labour supply decision depend on?

the equality between the marginal rate of substitution between consumption and leisure and the real wage

what are the elements of the basic structure o a model?

• exogenous variables

• endogenous variables

what is the compeitive equilibrium?

representative consumer optimises given market prices and representative firm optimises given market prices

what is output produced accordinf to?

a production function

what is the slope of the production function?

the marginal product of labour

what does the PPF describe?

the possibilities for producing consumption and leisure in this economy, after the government takes out G units of consumption goods

how is tthe competitive equilibrium constructed?

superimposing the consumer’s indierence curved on the diagram tthat includes the PPF

what is the Pareto optimum?

the allocation that is chosen by a ficticious social planner to make the representative consumer as well of as possible

what market can deliver a pareto optimal outcome?

a competitive market economy with flexible factor and goods prices

what rate is equal to the MPL?

the rate at which a household is willing to substitute leisure for consumption is the same as the rate at which firms can transform leisure into goods

what is the first welfare theorem

under certain conditions, a competitive equilibrium is Pareto optimal

what is the second welfare theorem

under certain conditions, a pareto optimum is a competitive equilibrium

what does an increase in gov spending cause?

a pure negative income effect, an increase in output, decrease in private consumption and real wage

what happens to consumption and leisure with an increase in gov spending?

they decrease

what does gov spending do o private consumption

crowds out; not to same extent

why doesn gov spending crowd out fully

because households supply more labour

what occurs with an increase in total factor productivity?

output, consumption, real wage and usually supply of labour