Transcript Document

Consumer Behavior
Representative Consumer
•
Rationale
•
Two goods
•
Consumption bundles
Representative Consumer:
• Preferences
• Three properties of preferences:
1.More is preferred to less
2.Likes diversity
3.C and L are normal goods
Preferences, Utility function, and
Indifference Curves
•
•
•
Utility function
What is an indifference curve?
Properties of indifference curves
(derived from properties of preferences).
MRS(l,C), Marginal Rate of
Substitution of l for C
• MRS(l,C) amount of C we would give up to
get one additional unit of l (at the margin).
• Equal to (-1) times the slope of the
indifference curve
• Properties:
Consumer Choice
• Consumer’s “problem” is to choose the
best consumption bundle subject to
constraints:
– Time constraint
– Budget constraint
Budget Set (T < π case)
Consumer Optimization
Income (or “Wealth”) Effects:
• “What happens when non-wage income
changes?”
• Change in non-wage income induces a
“pure
income (wealth) effect”.
• Recall “both goods are normal”
assumption…
So what is the net effect
of Δ(π – T ) > 0 ?
Increase in the real wage rate:
Income and substitution effects
• Key: w is
1. wage earned on labor hours, but also
2. Price of leisure relative to consumption!
• Increase in w increases (w*h + π – T)
• Then both goods normal, so…
• But w increases price of l relative to C, so…
• Conclusion: Consumption must rise, but leisure
may rise or fall.
Increase in the real wage rate:
Income and substitution effects
Labor Supply Curve
•
•
Ns(w) = h – l(w)
What is the effect of an increase in nonwage income? (dividends or lump-sum
taxes)
Production of Goods
• What are goods good for?
• “Technology”: the Production Function:
Y = zF( K, Nd )
– K and Nd are inputs or “factors of
production”.
– z is total factor productivity.
• K is determined by past investment
• Nd may be varied in the short run.
Marginal Products, MPN
• Marginal product of labor (MPN) is the
amount of additional output produced by
adding an additional unit of Nd (holding K
fixed).
Marginal Products, MPK
• Marginal product of capital (MPK) is the
amount of additional output produced by
adding an additional unit of K (holding Nd
fixed).
Cobb-Douglas Production Fn
•
Y = zKa (Nd)b
Assumptions about the production
function
• 1. Constant returns to scale (CRS)
Increasing production fn:
• 2. ↑K or ↑Nd causes ↑Y
Equivalent statement: MPN>0, MPK>0,
Diminishing marginal products:
• 3. MPN decreases as N increases.
• 4. MPK decreases as K increases.
Complementarities in production:
• 5. MPN increases as K increases
(and MPK increases as N increases).
• Complementarities in prod’n:
• 5. MPN increases as K increases
(and MPK increases as N increases).
Figure 4.17 Adding Capital
Increases the Marginal Product
of Labor
What’s z?
•
Total factor productivity represents level of
technology or efficiency in prod’n.
Examples of z changes
– technological advance, discovery of new
techniques,etc.
– Random economic shocks (weather)
– Inefficiency induced by gov’t regulation
– Energy price shocks
Figure 4.18 Total Factor
Productivity Increases
Figure 4.19 Effect of an Increase
in Total Factor Productivity on
the Marginal Product of Labor
The Objective of the Firm is…
MAXIMIZE PROFIT!
Profit is...
– Revenue minus costs:
• π = Y – w*Nd= zF( K, Nd ) – w*Nd
Cobb-Douglas Production fn and
the Solow Residual
• Y = zKa (Nd)b
• – Exhibits CRS if b = 1 – a
• Theory says that share of Y paid to labor should
be 1-a:
1 – a = w*N / Y
• Looking at data, set 1 – a = .64 (a = .36).
• The “Solow residual” is measure of TFP (z)
obtained this way:
• z = Y / ( K.36 (Nd).64 )
Figure 4.20 The Solow
Residual for the United States