ECO 3203 Session 15-17 CH 7

What determines output in the short run? And length?

Demand where prices are fixed - Length: a few years

What determines output in the medium run? And length?

Returns to natural rate of unemployment - length: 10 years (capital, tech & LF is fixed)

What determines output in the long run? And length?

Depends on savings/saving rate, institutions, & education - Length: several decades + variable)

If demands runs too hot

inflation rises

If demands runs too cold

unemployment rises

Employed

Has a job, ft/pt, unpaid

Unemployed

No job but looking for one, temporary layoffs

Out of the labor force

Not working or looking for a job (retired, students, discouraged workers)

Labor force formula

L=N+U (employed + unemployed)

Unemployment rate formula

U=U/L x 100 (U=unemployed divided by labor force)

Participation rate formula

PRF= L/CNP x 100 (labor force divided by civil non pop)

What are the 3 ways that wages are set?

1) Collective bargaining: firm and union negotiates

2) Employer sets the wage: take it or leave it

3) One-on-one bargaining: you negotiate with the employer

Most workers earn more than their …..

reservation wage

What is a reservation wage?

the lowest amount of $ someone is willing to accept instead of staying broke and unemployed

The lower the unemployment rate

the more bargaining power a worker has

The higher the unemployment rate

the less bargaining power a worker has

What is an efficiency wage?

firms paying workers more on purpose to limit turnover (quits) so less money on hiring/training & increase productivity

what is the wage setting formula?

W = P^e F (u, z) / W = P^e (1 - alfa(u)-z) / w/p = 1 - u (ps amount)

What does each letter of the wage setting formula represents

w=nominal wage, p^e=expected, f=function of unemployment rate, u=unemployment, z=catch all factors

What is the production formula?

Y=AN

What does each letter in the price setting formula stand for?

Y = output, A= labor productivity/output per worker, N=employment

What is the markup formula and what does each letter stand for?

C(1+m) where c is cost and m is markup

What is the Price Setting formula?

P=(1/1+m)W or W/P= (1/1+m)

Under perfect competition…

M=0

In price setting, real wage is determined by

ONLY when markup changes (if markup goes up real wages goes down, if markup goes down, real wage goes up)

PS Curve is

Horizontal

Wage setting is

downward sloping

T or F: In PS, real wage is determined by unemployment

F: real wage is determined by markup in PS, while is WS, unemployment determines real wage

What does WS affect?

WS affects jobs & workers. It is what workers expect to receive

What does PS affect?

PS affects businesses and customers. It is what a business is willing to pay

What is a Markup?

The extra amount of $ added to production cost because businesses want to pay less so they charge more so it technically pays for itself

Higher Markup means?

PS shifts down because firms are willing to pay less

Lower Markup means?

PS shifts up because they don’t need to offset that cost/charge more

Nominal wage is?

How much $ you make

Real wage is?

How much things you can afford (purchasing power)

A change in U only moves?

Along the WS but it DOESN’T shift WS OR PS

What is actual unemployment?

The unemployment rate that we can see right now

What is natural unemployment?

The unemployment rate the economy tends to return to over time

In a recession, actual unemplyment rises … the natural rate

above

In a boom, actual unemployment falls….the natural rate

below

What does “s” represents?

Seperation rate - the amount of people losing or leaving their jobs

What does “f’ represent?

Job finding rate - the amount of people landing a job each month

What is the unemployment rate formula?

Un=U/L=s/s+f

To lower the natural rate of unemployment, a policy must either lower….or raise…..?

lower the separation rate or raise the job finding rate.

What happends if the job-finding rate increases?

The natural rate of unemployment decreases

What happens if the separation rate increases?

The natural rate of unemployment decreases

Unemployed caused by the time it takes to search is …. unemployment

frictional

When more people want to work than firms wants to hire, and jobs get rationed this type of unemployment is called …. unemployment

structural

Firms may keep pay high on purpose to attract better applicants, reduce __________, and cut turnover.

Shirking

The natural rate is the sum of __________ and __________ unemployment.

U (frictional) and U (Structual)

____unemployment is the gap between the actual and natural rates, u − un.

Cyclical

When u falls below un, labor markets tighten, wages and prices speed up, and inflation ______.

rises

NAIRU is the?

non-accelerating-inflation rate of unemployment.