1. The Theory of Aggregate Supply
Chapter 4
The Theory of Aggregate Supply

2. The Production Function
The boundary of this area is called the production function. Y1
Y (Amount of unique commodity produced) L1 B
Time spent at work
Time spent at leisure
L (Labor)
Figure 4.1
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3. YS 3 2 1 LD Maximizing Profits Y (Output Supplied)
L (Quantity of Labor demanded)
Figure 4.2
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4. Deriving the Investment Demand Curve Y (Quantity of output Supplied)
Panel A YS A
Y (Quantity of output Supplied) A LD A
LD (Quantity of Labor demanded)
Figure 4.3A
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5. Deriving the Investment Demand Curve Y (Quantity of output Supplied)
Panel B YS B
Y (Quantity of output Supplied) B LD B
LD (Quantity of Labor demanded)
Figure 4.3B
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6. Deriving the Investment Demand Curve
Panel C A
(Real wage) B LD A LD B
LD (Quantity of Labor demanded)
Figure 4.3C
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7. YD 2 U3 U2 U1 LS Maximizing Utility YD (Commodities demanded)
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Maximizing Utility
The same line that represents the iso-profit line of the firm also represents the budget constraint of the family. The slope of this line is the real wage rate U3
YD (Commodities demanded) YD U2 2
In its role as a household the family chooses the highest indifference curve that is tangent to the budget constraint U1
(Profit of the firm) LS
LS (Quantity of labor supplied)
Figure 4.4

8. YD (Q of commodities demanded)
The Labor Supply Curve
Panel A
Slope A YD A
YD (Q of commodities demanded) LS A
LS (Quantity of labor supplied)
Figure 4.5A
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9. YD (Q of commodities demanded)
The Labor Supply Curve
Panel B
Slope B YD B
YD (Q of commodities demanded) LS B
LS (Quantity of labor supplied)
Figure 4.5B
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10. B A LS LS The Labor Supply Curve Panel C Labor supply curve
 (Real wage) A LS A LS B
LD (Quantity of labor supplied)
Figure 4.5C
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11. Average Work Habits in Three Countries
1,700
1,800
1,900
2,000
2,100
1,600
1,500
2,200
Average Work Habits in Three Countries
Hours worked
U. S.
Britain
Germany
Country
1975
1995
Box 4.1A
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12. 1987 dollars per year (in thousands)40 30 20 10
1987 dollars per year (in thousands)
Percentage of population 45 40 35 30
Time 25 20
1900
1920
1940
1960
1980
Number unemployed as a percentage of U.S. population
Real wage in thousands of 1987 dollars per year
Box 4.1B
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13. 1 E 2 LS LD LE LS LD Labor Market Equilibrium Labor supply
Labor demand
 (Real wage) 2 LS 2 LD 1 LE LS 1 LD 2
L (Quantities of labor demanded and supplied)
Figure 4.6
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14. The Effect of a New Invention on the Labor Market
Production function2
LE2
YE2
Production function1
Y (Aggregate supply of commodities)
YE1
LE1
Employment
Figure 4.7
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15. The Effect of a New Invention on the Labor Market
Labor supply
E2
 (Real wage)
E1
Labor demand2
Labor demand1
LE1
LE2
L (Quantity of labor demanded and supplied)
Figure 4.7
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16. The Effect of a Change in Tastes on Employment and Output
YE2
Production function
Y (Aggregate supply of commodities)
YE1
LE1
LE2
Employment
Figure 4.8A
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17. The Effect of a Change in Tastes on Employment and Output
Labor supply1
Labor supply2
E1
E2
 (Real wage)
Labor demand
LE1
LE2
L (Quantity of labor demanded and supplied)
Figure 4.8B
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18. END