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03 Productivity, Output, and Employment, Part 1-1

03 Productivity, Output, and Employment, Part 1-1 - Agenda...

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1 3-1 Productivity, Output, and Employment, Part 1 3-2 Agenda The Production Function The Demand for Labor 3-3 The Production Function • A production function shows how businesses transform factors of production into output of goods and services through the applications of technology. 3-4 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 ).
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2 3-5 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. 3-6 The Production Function A more specific production function that works well in macroeconomics is the Cobb- Douglas production function. Y = AK ˞ N (1- ˞ ) For the U.S. economy it would be: Y = AK 0.3 N 0.7 3-7 The Production Function The Production Function: Output and Capital ¾ Shows how Y depends on K for a given N and A. 3-8 The Production Function: Output & Capital K Y
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3 3-9 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. 3-10 The Production Function The Production Function: Output and Capital ¾ Marginal product of capital , MPK = ' Y / ' K . Equals the slope of production function graph ( Y vs. K ).
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