Economics concepts and applications

Economics

When labor demand increases and the supply of labor is held constant, this will have the affect of driving up the real hourly wage. As labor becomes increasingly scarce, the curve of the increase in real hourly wage will become increasingly steep. Under this scenario, the aggregate output line will begin to flatten. This is a result of a couple of factors. One is the diminishing returns to labor, which will naturally flatten this curve as it moves to the right. The other is that with no increase in the supply of labor, finding skilled workers becomes more difficult. As a result, firms will use labor that is less skilled than the existing labor pool. This will also serve to diminish the output per unit of labor, causing the curve to flatten even more as it moves to the right. There is the risk that at the extreme end, when the labor pool is almost totally exhausted, the quality of the labor will be so poor as to undermine the existing labor, resulting in a reduction of output for each new unit of labor added.

When labor supply increases, it will drive the real hourly wage down to the minimum wage level. Aggregate output will remain on its normal trajectory, as the skills of the workers hired will match perfectly the skills needed for the job.

7-7) a) Government spending will be Payroll + Outlay for Materials; so 3 + 2 = 5 b) Net taxes will be total taxes minus transfer payments. Total taxes in this example are equal to total government expenditures, which is $12. Transfer payments include welfare ($5) and UI ($2). Thus, net taxes are 12-7 = $5.

A c) Total planned investment is the new capital stock, so the increase in capital stock, plus depreciation. In this example new capital stock = 103-100 + 7 = $10.

A d) Real GDP = (C + I + G) / (1 + r) = (50+10+5) / (1.06) = 61.32 e) Total savings = Disposable income - consumption. Disposable income = GDP - Net Tax. Thus, DI = 65-5 = 60. Total savings = 60-50 = 10 f) Total leakages = Net taxes + Savings = 5 + 10 = 15 g) Total injections = I + G = 10 + 5 = 15

8-5) if the capital stock decreases, workers will be less efficient, which will reduce the production function. However, companies will adjust be reducing demand for labor. This will increase worker productivity. The net effect may be that the productivity function moves back towards equilibrium. The remaining workers are likely to be the best workers, which will contribute to this move. However, gross output will drop, hampering the productivity function, such that equilibrium is not fully reached. The net will be a shift downward in the production function, but not as far downward as would occur if the labor demand curve remained static.