Chapter 3 Part 1

Chapter 3 Part 1 - Chapter 3 Productivity, Output and...

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1 Chapter 3 Productivity, Output and Employment
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2 Introduction In this chapter, we will discuss the factors that determine an economy’s productive capacity (i.e. the quantity of goods and services an economy can produce). Other things being equal, the greater the quantity of output, the more people will be able to consume in the present and invest for the future.
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3 Production 2 factors determine the amount of output that an economy can produce: The quantities of inputs (such as labor, machinery, raw materials) utilized in the production process The productivity of the inputs (i.e. the effectiveness with which they are used).
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4 Production Higher productivity means fewer inputs are needed to produce the same amount of output. Improvement in technology and management practices might contribute to higher productivity.
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5 Production Production Process (determined by the level of technology & management skills) Output (Y) Inputs: Capital, Labor, Land, energy etc.
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6 Production Function The production function is an expression relating the amount of output produced to quantities of capital and labor utilized. Y: real output produced in a given period of time A: measure of overall productivity (Total Factor Productivity) K: the quantity of capital used N: the number of workers employed (labor) Y = A F( K, N)
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7 Production Function The production function applies both to an economy as a whole and to an individual firm. When applied to an individual firm, Y denote the firm’s output, K denote the firm’s capital stock, N denote the firm’s labor input.
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8 The Shape of Production Function Consider a firm who produces output according to Y=AF(K,N). Suppose the firm keeps on increasing labor input but holds the amount of capital input (K) fixed. What would happen ? output will increase the increase in output diminishes as the firm keeps adding labor. Labor Input Output Holding A and K constant.
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9 Example Consider a supermarket that has a fixed number of cash registers, say 20. Each cash register needs 1 worker to operate. In this “production” process, Output: the number of customers that can be served during a specified period of time. Inputs: Cash register (capital) and Worker .
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10 Example Suppose only 5 of the registers are operating and there is a long line in each lane. By opening the 6 th lane ( adding one more worker ), more customers can be served during a certain period of time ( i.e. output ↑ ). By opening more and more counters, “output” would keep on increasing but the increment or the additional benefits would diminish.
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11 Intuition Whenever the labor input is increased, more (not less) output can be produced. When N is low, there are not
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Chapter 3 Part 1 - Chapter 3 Productivity, Output and...

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