03+Aggregate+Production+and+Productivity

# Changes in the labor force l increases in l raise the

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Unformatted text preview: pital curve: 1. Changes in the labor force, ΔL. • Increases in L raise the MPK and shift the demand for capital curve to the right. 1. Output and capital, or 2. Output and labor. 2. Supply (or technology) shocks, ΔA. • The production function, Y = A*F(K, L), can be drawn as either: Beneficial supply shocks raise the MPK and shift the demand for capital curve to the right. 3-17 The Production Function: Output & Labor • 3-18 The Production Function: Output & Labor The production function between output and labor shows how: – – the size of the labor force, L, – for a given capital stock, K0, and – Y=AF(K,L) Economic output, Y, depends on for a given level of technology, A0. 3-19 3-20 when economy grows quickly, we need more workers since capital stays the same, you need more labor if you want to increase production whatever is happening to economic output will help us determine what is happening to employment, and vice versa slope at less labor is steeper 5 The Production Function: Output & Labor • The Production Function: Output & Labor Marginal product of labor, MPL = Y/L • 1. Equals the slope of this production function. Two properties of this production function: 1. Exhibits increasing returns to labor. • Slopes upward because more L produces more Y. 2. Is always positive. 2. Exhibits diminishing marginal product of labor. 3. Declines as the amount of labor increases. • Slope becomes flatter because each additional increment of L eventually produces smaller increments of Y. 3-21 The Production Function: Output & Labor 3-22 Determination of Labor Returns, w MPL • Now, in equilibrium, the real wage, w, will equal the marginal production of labor, i.e., w = MPL – So the MPL is also the demand for labor, LD. • Suppose the supply of labor, LS, is fixed, i.e., MPL LS = L L 3-23 3-24 6 Determination of Labor Returns, w The Production Function: Output & Labor • w, MPL excess supply B If either K0 or A0 changes, what happ...
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