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2019 | OriginalPaper | Buchkapitel

3. The Basic Economic Model

verfasst von : Thorsten Hens, Sabine Elmiger

Erschienen in: Economic Foundations for Finance

Verlag: Springer International Publishing

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Abstract

In the basic economic model, there are two types of participants, households and firms, who interact via two markets, the goods market and the labor market. Throughout the book we assume that the large number of individual households and firms in the economy can be pooled together and modeled as one representative household and one representative firm.

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Vorheriges Kapitel Financial Markets and Institutions

Nächstes Kapitel Extension of the Model to Capital

We therefore use the singular and plural interchangeably throughout the book.

In reality, however, it can occur that some firms are so big in size that they can influence prices even though there is a large number of competitors.

The utility function could also be affected by the labor supply of the household. However, in this section we neglect this case for the sake of simplicity. See Exercise 3.2 for an example with disutility from labor.

Let y = f(x), then the elasticity of y with respect to x, \(\epsilon _{yx} = \partial _x f(x) \frac {x} {y} = \frac {d \ln y} {d \ln x} \) is the percentage change of y with a change of x by one percent. In our example, Y = (L ^d)^γ and thus \(\frac {d\ln y}{d\ln x}=\frac {d\gamma \ln L^d}{d\ln L^d}=\gamma \).

A straight line on which the profits of the firm are equal everywhere.

Since the production function satisfies assumption (F3), it is concave, and the first order condition π′(L ^d) = 0 is indeed sufficient for the solution of the profit maximization problem.

w ₀ and π ₀ are the real wage and the real profits when g = 0.

Y _n denotes output when the population grows at the rate n. Consequently Y ₀ denotes output when there is no population growth.

Lettau, M., & Ludvigson, S. (2001). Consumption, aggregate wealth, and expected stock returns. Journal of Finance, 56 (3), 815–849.CrossRef

Titel: The Basic Economic Model
verfasst von: Thorsten Hens
Sabine Elmiger
Verlag: Springer International Publishing
Buch: Economic Foundations for Finance
Print ISBN: 978-3-030-05425-0

Electronic ISBN: 978-3-030-05427-4

Copyright-Jahr: 2019
DOI: https://doi.org/10.1007/978-3-030-05427-4_3