Lecture # Chapter 7
Productivity – The quantity of goods and services that a worker can produce in each hour of
Determinants of Productivity:
• Physical Capital
• Human Capital (How much time people spend to read books, unlike technological
knowledge which describes the books in the library)
• Natural resources (Renewable and non-renewable)
• Technological Knowledge (Knowledge of how to combine input to product output, like
the books in the library)
• Production function shows how we combine inputs to produce output.
o Y =Ax F (K, L, H, N)
o Y is output
o Ais technology, which is separate for the equation.
o K is physical capital
o L is labour
o H is human capital
o N is natural resources
• If a production function exhibits Constant Return to Scale, then doubling all inputs
leads to doubling of output.
• There is also increasing return to scale and decreasing return to scale.
o xY =Ax F (xK, xL, xH, xN) • Y/L = Output Per Worker
• K/L= Capital Per Worker
Diminishing Marginal Product
• Product: Output
• Marginal Product: The extra output produced by increasing any input by 1 unit.
• Diminishing marginal product states that the m