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Lecture 7

# Its 10 maximum 0 1 2 3 4 5 6 7 8 9 10 labor per

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Unformatted text preview: decreasing   When marginal product is zero, total product (output) is at its maximum   Marginal product crosses average product at its 10 maximum 0 1 2 3 4 5 6 7 8 9 10 Labor per Month Production: One Variable Input Production Function Example   Production function for meals on wheels   From the previous example, we can see that as we increase labor the additional output produced declines   Average Product (given L=4)   Law of Diminishing Marginal Returns:   Marginal Product Law of Diminishing Marginal Returns   When the use of labor input is small and capital is fixed, output increases considerably since workers can begin to specialize and MP of labor increases   When the use of labor input is large, some workers become less efficient and MP of labor decreases As the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease Law of Diminishing Marginal Returns – Ctd.   Typically applies only for the short run when one variable input is fixed   Can be used for long-run decisions to evaluate the trade-offs of different plant configurations   Assumes the quality of the variable input is constant 4 Law of Diminishing Marginal Returns – Ctd.   Easily confused with negative returns – decreases in output Law of Diminishing Marginal Returns – Ctd.   Assumes a constant technology   Changes in technology will cause shifts in the total product curve   Explains a declining marginal product, not necessarily a negative one   Additional output can be declining while total output is increasing   More output can be produced with same inputs   Labor productivity can increase if there are improvements in technology, even though any given production process exhibits diminishing returns to labor Malthus and the Food Crisis The Effect of Technological Change Q=At*F(L,K) Output Moving from A to B to C, labor productivity is increasing over time C 100 O3 B A O2 50 diminishing returns limited agricultural output and the population continued to grow.   Why did Malthus prediction fail?   Did not take into account changes in technology O1 0   Malthus predicted mass hunger and starvation as 1 2 3 4 5 6 7 8 9 10 Labor per time period Labor Productivity   Macroeconomics are...
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