Chapter III Productivity

# Chapter III Productivity - Chapter III Productivity,...

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Chapter III Productivity, Output, and Employment Important assumption in the models that we will go over: Full employment Equilibrium is reached in all three markets Ceteris paribus, the greater the quantity of goods an economy can produce, the more people will be able to consume in the present and the more they will be able to save and invest for the future. Productivity how much output is produce for one unit of input The more we produce per unit of input the better the standard of living. The most looked upon is working hours. Do you know why? There are two factors use to determine the amount of output an economy produces: 1. The quantity of input utilized in the production process 2. The productivity of inputs. 3.1 How Much Does the Economy Produce? The Production Function Factors of production is refer to as inputs to the production process According to the book capital and labor are the most important. Capital has a long term affect while labor could be changed almost immediately by hiring or firing workers. The amounts of factors of production used do not completely determine the amount of output produced. What is important is the efficiency (Productivity). Ceteris paribus, the greater the quantity factors of production used, the more a country can produce. The effectiveness by which the factors of production (L, K) are used is shown by the production function. Production function is a mathematical expression relating the amount of output produced to quantities of capital and labor utilized. Denoted as: ( 29 ( 29 L K F A Y N K F A Y , , × = × = 1

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The US production function looks as follows: Y = AK 0.3 L 0.7 Please notice how we can only allocate 100% of the inputs!! Total Factor Productivity (A) is a measure of overall effectiveness with which capital and labor are used. At x% increase in productivity implies that the economy (or firm) can produce x% more. Thus, A corresponds to improvement in production technology or any other changes in the economy that allows capital and labor to be utilized more efficiently. What other factor of production could cause this and what part of the economy could create this? I. The Shape of the Production Function (pg 66) Y What does the graph show? As K increases what happens? K Properties of the production function: The production function is upward sloping. It has a diminishing rate of input (example pg 67) a. The Marginal Product of Capital (MPK) The marginal product of capital is the increase in output produced that results from a one-unit increase in the capital stock. The change of output is defined ΔY The change of capital is defined ΔK The additional amount of output per on additional unit of capital is ΔY/ΔK; also defined as ∂Y/∂K. Y is the vertical axis.
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## This note was uploaded on 06/24/2011 for the course ECO 3202 taught by Professor Telier during the Spring '08 term at FIU.

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Chapter III Productivity - Chapter III Productivity,...

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