ECON 3601 Lecture Notes - Lecture 3: Diminishing Returns, International Trade, Production Function
10 Jun 2018
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Chapter 4
The Specific Factors Model
• The specific factors model allows trade to affect income distribution.
• Assumptions of the model:
– Two goods, cloth and food.
– Three factors of production: labor (L), capital (K) and land (T for terrain).
– Perfect competition prevails in all markets.
– Cloth produced using capital and labor (but not land).
– Food produced using land and labor (but not capital).
– Labor is a mobile factor that can move between sectors.
– Land and capital are both specific factors used only in the production of one
good.
• How much of each good does the economy produce?
• The production function for cloth gives the quantity of cloth that can be produced given
any input of capital and labor:
QC = QC (K, LC)
– QC is the output of cloth
– K is the capital stock
– LC is the labor force employed in cloth
• The production function for food gives the quantity of food that can be produced given
any input of land and labor:
QF = QF (T, LF)
– QF is the output of food
– T is the supply of land
– LF is the labor force employed in food
Production Possibilities
• Ho does the eoo’s i of output hage as lao is shifted fo oe seto to the
other?
• When labor moves from food to cloth, food production falls while output of cloth rises.
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• The shape of the production function reflects the law of diminishing marginal returns.
– Adding one worker to the production process (without increasing the
amount of capital) means that each worker has less capital to work with.
– Therefore, each additional unit of labor adds less output than the last.
• Figure 4-2 shows the marginal product of labor, which is the increase in output that
corresponds to an extra unit of labor.
• For the economy as a whole, the total labor employed in cloth and food must equal the
total labor supply:
LC + LF = L (4-3)
• Use these equations to derive the production possibilities frontier of the economy.
• Use a four-quadrant diagram to construct production possibilities frontier in Figure 4-3.
• Lower left quadrant indicates the allocation of labor.
• Lower right quadrant shows the production function for cloth from Figure 4-1.
• Upper left quadrant shows the corresponding production function for food.
• Upper right quadrant indicates the combinations of cloth and food that can be
produced.
• Why is the production possibilities frontier curved?
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The specific factors model: the specific factors model allows trade to affect income distribution, assumptions of the model: Three factors of production: labor (l), capital (k) and land (t for terrain). Cloth produced using capital and labor (but not land). Food produced using land and labor (but not capital). Labor is a mobile factor that can move between sectors. Lc is the labor force employed in cloth: the production function for food gives the quantity of food that can be produced given any input of land and labor: Lf is the labor force employed in food. Adding one worker to the production process (without increasing the amount of capital) means that each worker has less capital to work with. Lc + lf = l (4-3: use these equations to derive the production possibilities frontier of the economy, use a four-quadrant diagram to construct production possibilities frontier in figure 4-3. Lower left quadrant indicates the allocation of labor.
