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Trev4Micro. Labour classical, leisure prefference, Firms cost minimisation, equilibrium and cobweb

1.         Labour supplys can be:

Labour leisure

If wage rises:

If consumers have a target wage (they don't want more), they want more leisure. So abstenternism rises.

In long run income effects are stronger, in short run substitution is stronger.

2.         Firm aim is to minimise costs (labour want to max utility) at given level of output

Assume our that a single firm receives a prespecified order ie 200 cars. Q=200. In well behaving neoclassical model firm faces infinite possibility of prof.functs:

constant returns to scale, isoquant stripet

K= - *L


MPPk*dK+MPP*dL=dQ in isoquant=0


Cost minimising

Maximise U=U(x1,x2,...,xn)

subject to M=P*X1+P2X2 ..

For firm minimse C=wL+rK

subject to Q=Q0

K/L - cost minimising techique of production.

Cost minimising equilibrium MPPl/w=MPPk/r

Assume labour becomes cheaper

Fixed coefficienct of production (isoquant has a kink) produce only at kink.

If no infinite sets of production exists:

3 efficient production paths T1 T2 T3, so if labour becomes much cheaper, firm alters production techniques.

Equilibrium in economics

In equilibrium Dt-St=0 for any t.

In this case Ls>Ld

The can be excess suply onn the labour market. Classicalists - eq. is when all the markets clear.

Consider Saving and investment relations. Classical: S and I go to eq. through interst.

Keynes said that this case can't exist as people will only hold illiquid assest if it is profitable.

-unique equilibrium. Also Keynes equilibrium is unique.

There can be unstable equilibria, when S is backward bending more than demand. So even though equilibria exists, it is never reached.

Cobweb theorem. Factors modifying:

1.         Producers learn from experience

2.         Distributed time lags

3.         Unplanned variations of supply will modify further (especially in agriculture)

4.         Prices might be inflexible (change too slow to bring about a change)

Standard diagram.

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