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Chapter 3

Chapter 3 - Productivity, Output and Employment

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ECON 291
Geoff Dunbar

ECON291Chapter 33 Productivity Output and Employment31 ProductionIn this section we will examine the factors that cause production to occur What are factors of productionCapital goodsLabourRaw materialsLandEnergyThese are the inputs to production Productivity refers to how effectively they are usedWe typically expect diminishing returns to production from the quantities of inputsGenerally capital and labour are the most important factors of production Economists usually describe the production function mathematically asYAFK NWhereYGDPAa productivity parameter total factor productivityanything besides capital and labourFthe function relating K N and YKthe quantity of capital usedNthe amount of labour usedOne common functional form of FKN is the CobbDouglas production function1YAKN 0a1 capitals share of national incomeGenerally a value of 036 seems to fit the data quite well Between 0304 worksThe parameter A is known as total factor productivity since it is not directly related to either capital or labourFor example an increase in oil prices might decrease A because machines are more expensive to run and so are run less even though capital and labour are constantWhat does a CobbDouglas production function look likeUpward sloping in both K and Nie YK0 and YN0The slope of the production function becomes flatter2222ie YK0 and YN032 Marginal Product of CapitalThe marginal product of capital or MPK is the increase in Y resulting from a oneunit increase in K ie MPKYK or in discrete terms MPKYK22 The tendency for the MPK to fall as K increases ie YK 0 is referred to as the diminishing marginal productivity of capitalWhy does the MPK tend to fall Basic thrust of argument is that if you have 10 thworkers and 11 computers what does that 11 computer do
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