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In the classical general equilibrium model, the individual is assumed to be the basic unit of analysis and these individuals, both workers and employers, will make choices that reflect their unique tastes, objectives, and preferences. It is assumed that individuals' wants typically exceed their ability to satisfy them (hense scarcity of goods and time). It is further assumed that individuals will eventually experience diminishing marginal utility. Finally, wages and prices are assumed to be elastic (they move up and down freely). The classical model assumes that traditional supply and demand analysis is the best approach to understanding the labor market. The functions that follow are aggregate functions that can be thought of as the summation of all the individual participants in the market. In common speech, the word individual most often refers to a person, or, by analogy, to any specific object in a group of things. ...
A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ...
A wage is the amount of money paid for some specified quantity of labour. ...
For people whose family name is Price see Price (disambiguation). ...
The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...
Labour economics seeks to understand the functioning of the market for labour. ...
In economics, aggregate supply is the total supply of goods and services by a national economy during a specific time period. ...
Labor Demand The consumers of the labor market are firms. The demand for labor services is a derived demand, derived from the supply and demand for the firm's products in the goods market. It is assumed that a firm's objective is to maximize profit given the demand for its products, and given the production technology that is available to it. Profit is a positive return made on an investment by an individual or by business operations. ...
Some notation:
Let p be price level of commodities Let w be nominal wage Let ω be real wage (w/p) Let π be profit of firms Let LD be labor demand Let YS be the firms output of commodities that it will supply to the goods market.
Output function Let us specify this output (commodity supply) function as the complex variable: - YS(LD)
It is an increasing concave function with respect to LD because of the Diminishing Marginal Product of Labor. Note that in this simplified model, labour is the only factor of production. If we were analysing the goods market, this simplification could cause problems, but because we are looking at the labor market, this simplification is worthwhile. In microeconomics, Production is simply the conversion of inputs into outputs. ...
Firms' profit function Generally a firm's profit is calculated as: profit = revenue - cost
In nominal terms the profit function is: 
In real terms this becomes: 
Firms' optimal (profit maximizing) condition In an attempt to achieve an optimal situation, firms can maximize profits with this Maximized profit function: 
When functions are given, Labor Demand (LD) can be derived from this equation.
Labor Supply The suppliers of the labor market are households. A household can be thought of as the summation of all the individuals within the household. Each household offers an amount of labour services to the market. The supply of labour can be thought of as the summation of the labour services offered by all the households. The amount of service that each household offers depends on the consumption requirements of the household, and the individuals relative preference for consumption verses free time. The household is the basic unit of analysis in many microeconomic and government models. ...
Some notation:
Let U be total utility Let YD be commodity demand (consumption) Let LS be labor supply (hours worked) Let D(LS) be disutility from working, an increasing convex function with respect to LS.
Households' consumption constraint Consumption constraint = profit income + wage income
Households' utility function total utility = utility from consumption - disutility from work
U = YD − D(LS)
substitute consumption:
Households' optimal condition Maximized utility function:
When functions are given, Labor Supply (LS) can be derived from this equation.
Aggregate Demand
Monetary Market hiiii - MV=PY(Cambridge equation)
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