Lecture 1

Introduction to Macroeconomics A Representative Firm Read: Chapter 4

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Gross Domestic Product, Economic Growth, and Business Cycles Gross Domestic Product (GDP): the quantity of goods and services produced within a countrys borders over a particular period of time. The time series of GDP can be separated into trend and business cycle components.

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Figure 3.1 Idealized Business Cycles

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Figure 1.2 Natural Logarithm of Per Capita Real GDP

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Figure 1.4 Percentage Deviations from Trend in Per Capita Real GDP

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The Representative Firm

The production function. Profit maximization and labor demand.

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The Firms Production Function

z: total factor productivity (Productivity) K: the quantity of capital input (Capital) N: the quantity of labor input (Labor)

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Constant Return to Scale

F ( aK , aN ) = aF ( K , N )

Example : F ( K , N ) = KN F (K , N ) = K + N F ( K , N ) = min( K , N )
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The Cobb-Douglas Production Function

Y = zK N where

0 < <1

F ( K , N ) = K N 1 * * * CRS * * * F (aK , aN ) = (aK ) (aN )

= a a K a1 N 1 = aK N 1 = aF ( K , N )
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Marginal Product of Capital

Marginal Product of Capital

Y = zFK ( K , N ) MPK = K
Cobb-Douglas Production Function

Y N 1 1 MPK = = zK N = z K K

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Marginal Product of Labor

Marginal Product of Labor

Y = zFN ( K , N ) MPN = N
Cobb-Douglas Production Function

Y K MPN = = (1 )zK N = (1 )z N N

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Figure 4.12 Production Function, Fixing the Quantity of Capital and Varying the Quantity of Labor

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Figure 4.13 Production Function, Fixing the Quantity of Labor and Varying the Quantity of Capital

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Figure 4.14 Marginal Product of Labor Schedule for the Representative Firm

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Figure 4.15 Adding Capital Increases the Marginal Product of Labor

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Figure 4.16 Total Factor Productivity Increases

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Figure 4.17 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor

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Profit Maximization
When the firm maximizes profits, the marginal product of labor equals the real wage.

MPN = w
Benefit = Cost

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