Labor market = w/p and L
-suply curve: how many people will want to work at various real wage rates slopes upwards: as the wage rate increases, more and more individuals decide they are better off working than not working... rise in the wage rate increases the number of people in the economy who want to work
-demand curve: how many workers firms will want to hire at various real wage rates downward sloping: as the wage rate increases, each firm in the economy will find to maximize profit it should employ fewer workers than before a rise in the wage rate will decrease the quantity of labor demanded in the economy
-demand curve shifts: the capital stock, the availability of resources, taxes on goods sold
-supply curve shifts: size of the population, tastes for labor and market goods vs. leisure, taxes on consumption (taxes on labor we can represent in the labor market model)
If excess supply of labor: competition among workers would drive the wage down if excess demand of labor: competition among firms would drive wage upward equilibrium total employment = market clears, economy achieves full employment
-level of employment is achieved automatically
-unemployment is viewed as frictional.. frictional unemployment causes actual unemployment to be less than the maximum possible
Loanable funds market= r and S=I
-supply curve: level of household saving at various interest rates, slopes upward (quantity of funds supplied to the financial market depends positively on the interest rate)
-demand curve- businesses’ demand for loanable funds: equal to their planned investment spending, funds obtained are borrowed, firms pay interest on these funds
-demand curve shifts: exogenous variables: technical change or new product that gives some existing products a higher IRR, cheaper raw material prices, change in the cost of capital goods
-supply curve shifts: taxes on