Macro

What defines Neoclassical theory?

It explains production determination and income distribution between capital and labour.

What is GDP?

The total value of final goods produced in an economy.

How is value added calculated?

Value produced minus the value of intermediate inputs.

What are the main factors of production?

Capital and labour.

What is capital in production?

Tools, machines, and structures used in production.

What happens to output with constant returns to scale?

Output increases proportionally with input increases.

What is diminishing marginal product?

Marginal product decreases as one input increases while others are fixed.

How does the marginal product of labour (MPL) affect hiring?

Firms hire until MPL equals the real wage.

What is the relationship between MPL and labour demand?

MPL curve represents the firm's demand for labour.

What is the equilibrium real wage?

The wage that equates labour demand with supply.

How is the rental rate of capital determined?

By the intersection of demand for capital and its fixed supply.

What does the Cobb-Douglas production function illustrate?

Constant returns to scale and declining marginal products.

What is the implication of the neoclassical theory of distribution?

Each factor is paid according to its marginal product.

What is the significance of real wages?

They reflect the purchasing power of wages in terms of output.

What does the term 'returns to scale' refer to?

How output changes as all inputs are scaled up or down.

What is the effect of increasing returns to scale?

Output increases more than proportionally with input increases.

What is the effect of decreasing returns to scale?

Output increases less than proportionally with input increases.

How is income distributed between capital and labour?

Based on the determined factor prices in competitive markets.

What is the relationship between productivity and wages?

They should grow at similar rates according to neoclassical theory.