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Chapter 3 Notes.docx

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ECON 1000
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Econ Chapter 3 NotesCircular Flow of Dollars Through the EconomyHouseholds receive incomepay taxes to govt consume gs and to save through financial marketsFirms receive revenue from sale of gs pay for factors of production and householdsfirms borrow in financial market to buy investment goods housing factories Govt receives revenue from taxes to pay for purchases and excess tax revenue over govt spending is called public saving budget surplus positive or deficit negative An economies output of GS GDPdepends on quantity of inputs FoP and ability to turn input into output production functionFactors of productioninputs used to produce gs Most important are capital tools that workers and labour time spent workingKcapital and L is labourHave physical and human capitalassume economy has fixed KLAssume that factors of production are fully utilized no wasteBut this is not true Production FunctionHow much output produced from given amounts of KL YFKLTechnological change alters the production function better ways to produce gsPF property Constant returns to scaleif an increase of an equalin all FoP causes increase in output of the sameso if we get 10 more output we increase KL by 10 zY FzKzLEquation says that if we multiple KL by number z output is also multipliedSupply of Goods and Services FoP and PF determine quantity of gs supplied whicheconomy outputYFK LY Since KL assumed fixed Output also fixedFoP and PF also determine national income since outputtotal incomethModern Theory of how national income is divided amongst FoP18 centry idea that prices thadjust to balance supply and demand applied to markets for FoP together with 19 century idea that demand for each FoP depends on maginal productivity of that factor neoclassical theory of distributionFactor pricesDetermines distribution of national income Are the amounts paid to the FoP ex wage workers earn rent for owners of capitalAssume that supply is fixed regardless of factor price curve is vertical and demand curve downward slopingintersection gives equilibrium factor price Competitive Firmsmall relative to the markets in which it trades so it has little influence on market prices Ex A firm produces a good and sells it at market price because many local firms produce the good so we can sell without causing price to fall or stop selling without causing it to
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