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Unformatted text preview: 1 31 Productivity, Output, and Employment, Part 1 32 Agenda • The Production Function • The Demand for Labor 33 The Production Function • A production function shows how businesses transform factors of production into output of goods and services through the applications of technology. 34 The Production Function • Factors of production : ¾ Capital ( K ) ¾ Labor ( N ) ¾ Other (raw materials, land, energy, etc.) • The productivity of factors depends on technology and management ( A ). 2 35 The Production Function • The economy’s production function is: Y = AF ( K , N ) ¾ Shows how much output ( Y ) can be produced from a given amount of capital ( K ) and labor ( N ) and a given level of technology ( A ). ¾ The parameter A is “ total factor productivity ” or the effectiveness with which K and N are used. 36 The Production Function • A more specific production function that works well in macroeconomics is the Cobb Douglas production function. Y = AK α N (1 α ) • For the U.S. economy it would be: Y = AK 0.3 N 0.7 37 The Production Function • The Production Function: Output and Capital ¾ Shows how Y depends on K for a given N and A. 38 The Production Function: Output & Capital K Y 3 39 The Production Function • The Production Function: Output and Capital ¾ Two main properties of this production function: • Exhibits increasing returns to capital. – Slopes upward because more K produces more Y. • Exhibit diminishing marginal product of capital. – Slope becomes flatter because each additional increment of K produces less additional Y. 310 The Production Function • The Production Function: Output and Capital ¾ Marginal product of capital , MPK = ∆ Y / ∆ K ....
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This note was uploaded on 04/01/2008 for the course ECON 100B taught by Professor Wood during the Spring '08 term at Berkeley.
 Spring '08
 Wood

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