EC239 Chapter Notes - Chapter 4: Budget Constraint, International Trade, Real Change
Document Summary
Chapter 4- lecture 2: what happens to the allocation of labour and the distribution of income when the prices of food and cloth change, two cases, an equal proportional change in prices. Wage rate (w) rises in the same proportion as the prices, so real wages (i. e. , the ratios of the wage rate to the prices of goods) are unaffected. Basically, everybody continues to buy everything with their income just the way they used to. Real incomes of capital owners and landowners also remain the same. When only pc rises, labour shifts from the food sector to the cloth sector and the output of cloth rises while that of food falls. Wage rate (w) does not rise as much as pc since cloth employment increases and thus the marginal product of labour in the sector, falls. Response of output to a relative change in price of cloth.
