Lecture 1

• Introduction to Macroeconomics• A Representative Firm

• Read: Chapter 4

1-1

Gross Domestic Product, Economic Growth, and Business Cycles

• Gross Domestic Product (GDP): the quantity of goods and services produced within a country’s 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 3.1Idealized Business Cycles

1-3

Figure 1.2Natural Logarithm of Per Capita Real GDP

1-4

Figure 1.4Percentage Deviations from Trend in Per Capita Real GDP

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The Representative Firm

• The production function.• Profit maximization and labor demand.

1-6

The Firm’s Production Function

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

1-7

Constant Return to Scale

),min(),(),(),(

:

),(),(

NKNKFNKNKF

KNNKF

Example

NKaFaNaKF

=+=

=

=

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The Cobb-Douglas Production Function

10

1

<<

= −

α

αα

where

NzKY

( ) ( )),(

),(

******),(

111

1

1

NKaFNaKNaKaaNaKaNaKF

CRSNKNKF

a ===

=

=

−−−

−

−

ααααα

αα

αα

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Marginal Product of Capital

• Marginal Product of Capital

),( NKzFKYMPK K=∂∂

=

• Cobb-Douglas Production Functionα

αα αα−

−−

==

∂∂

=1

11

KNzNzK

KYMPK

1-10

Marginal Product of Labor

• Marginal Product of Labor

),( NKzFNYMPN N=∂∂

=

• Cobb-Douglas Production Function

( ) ( )α

αα αα

−=−=

∂∂

= −

NKzNzK

NYMPN 11

1-11

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

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

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Figure 4.14Marginal Product of Labor Schedule for the Representative Firm

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Figure 4.15Adding Capital Increases the Marginal Product of Labor

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Figure 4.16Total Factor Productivity Increases

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Figure 4.17Effect 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.

wMPN =

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Benefit = Cost