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Lecture 12

LECTURE 12.docx


Department
Economics
Course Code
ECON 1BB3
Professor
Hannah Holmes
Lecture
12

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ECON 1BB3- LECTURE 12
(Chapter 7)
Y=a .f (K,L,H,N)
Y= output
A= techonology
F() is a function of
K= physical capital
L=labour
H= human capital
N=natural resources
Assumptions
1) Constant returns to scale
If a production exhibits constant returns to scale, then doubling all inputs
leads to a doubling of output
We can draw our production function in per capita terms
2Y= A.F(2K, 2L,2H, 2N)
100Y=A.F(100K,100L,100H,100N)
xY= A.f(xK, xL, xH, xN)
Y/L=A.F(K/L,1,H/L,N/L)
Production function can be written into per capita terms
This says that output per worker depends on capital per worker human
capital per worker and natural resources per worker
2) Diminishing Marginal product
Marginal product: the extra product produced by increasing an input by 1
unity
Diminishing marginal product: the extra output produced by adding the 19th
unit of labour is smaller than the extra output produced by adding the 18th unit
of labour
Output still goes up when we add a input
The increase of input is smaller than when we added the last unit of
input
Tells us about the shape of the production function
Catch up effect: poor countries tend to grow faster than rich countries
The increase in the saving rate does not lead to a permanent increase in the
growth rate (however it will increase in the level of GDP per worker); the
growth rate does not stay high forever
Shape of the production function clearly allows us to see the catch up affect
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