slides3 - Productivity ECG 507 Professor Allen 1 Production...

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Productivity ECG 507 Professor Allen 9/1/05
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1. Production technology The Production Function: Q = F(K,L) Q =  Output , K =  Capital,  L  = Labor In short run some inputs fixed, other  variable In long run, all inputs variable
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2. Average product The average product of labor ( AP ), or  output per worker, increases and then  decreases. L Q Input Labor Output AP = =
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3. Measuring productivity Labor productivity (Q/L) most commonly  used measure Q/L increases with K/L, so hard to easily  tell whether labor becoming more efficient  or K/L rising Multifactor productivity better suited to  track changes and make comparisons MFP = Q/(s L L + (1- s L )K)
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4. Marginal product The marginal product of labor (M P ), or  output of the additional worker, increases  rapidly initially (specialization) and then  decreases and becomes negative (K/L  declining). Graphically, equals slope of  production function.   L Q Input Labor Output MP L = =
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5. Returns to Scale Increasing returns to scale : output  increases at a faster rate than inputs Larger output associated with lower  cost (autos) One firm is more efficient than many  (electric utilities)
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