ECON100B_Section_0908-09

ECON100B_Section_0908-09 - ECON 100B Fall 2008 Discussion...

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1 ECON 100B Fall 2008 Discussion Section Notes Prepared by: Ailien Tran ( [email protected] ) Section: 9/8 and 9/9 The Production Function Production Function: Y = AF(K,N) describes the relationship between capital stock K, and labor N, where: Y = real output in a given period of time A = a number measuring overall productivity K = the capital stock, or quantity of capital used in the period N = the number of workers employed in the period F = a function relating output Y to capital K and labor N Cobb-Douglas production function. Y = AK α N (1- α ) For the U.S. economy it would be: = 0.3 0.7 Productivity is calculated as a residual: A = Y/K 0.3 0.7 Productivity growth is calculated as: % Δ A = Δ A/A * 100 The Shape of the Production Function Marginal product of capital (or labor) is the SLOPE of production function If Labor is constant, the graph will have K on the horizontal axis, and Output Y on the vertical axis. If Capital is constant, the graph will have N on the horizontal axis, and Output Y on the vertical axis. 1. The production function slopes upward from left to right: Reveals that, as the capital stock (or labor) increases, more output can be produced. 2. The slope of the production function becomes flatter from left to right: implies that more capital stock (or labor) leads to increase in output at a decreasing rate. The Marginal Product of Capital and Labor Diminishing Marginal Productivity of capital: the tendency for the marginal product of capital to decline as the amount of capital in use increases Marginal Product of Capital (MPK): the increase in output produced that results from a one-unit increase of the capital stock
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2 Marginal Product of Labor (MPN): the additional output produced by each additional unit of labor 1. The marginal product of capital (or labor) is positive: Production function slopes upward. Increase in capital stock leads to increase in output
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ECON100B_Section_0908-09 - ECON 100B Fall 2008 Discussion...

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