Lecture 11

# Lecture 11 - Lecture 11 Production Functions 1 Production...

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1 Lecture 11: Production Functions 2 Production Function z The firm’s production function for a particular good ( q ) shows the maximum amount of the good that can be produced using alternative combinations of capital ( k ) and labor ( l ) q = f ( k , l ) 3 Marginal Physical Product z To study variation in a single input, we define marginal physical product as the additional output that can be produced by employing one more unit of that input while holding other inputs constant k k f k q MP = = = capital of product physical marginal l l l f q MP = = = labor of product physical marginal

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4 Diminishing Marginal Productivity z The marginal physical product of an input depends on how much of that input is used z In general, we assume diminishing marginal productivity 0 11 2 2 < = = = f f k f k MP kk k 0 22 2 2 < = = = f f f MP ll l l l 5 Diminishing Marginal Productivity z Because of diminishing marginal productivity, 19th century economist Thomas Malthus worried about the effect of population growth on labor productivity z But changes in the marginal productivity of labor over time also depend on changes in other inputs such as capital we need to consider f l k which is often > 0 6 Average Physical Product z Labor productivity is often measured by average productivity l l l l ) , ( input labor output k f q AP = = = • Note that AP l also depends on the amount of capital employed
7 Average Physical Product z At the maximum of the average physical product curve l l MP AP = • Output ( q ) is at its maximum when MP l =0 • But not q / l • If MP l < AP l , adding one more labor will reduce labor productivity (AP l ) 8 Isoquant Maps z To illustrate the possible substitution of one input for another, we use an isoquant map z An isoquant shows those combinations of k and l that can produce a given level of output ( q 0 ) f ( k , l ) = q 0 9 Isoquant Map l per period k per period • Each isoquant represents a different level of output – output rises as we move northeast q = 30 q = 20

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10 Marginal Rate of Technical
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Lecture 11 - Lecture 11 Production Functions 1 Production...

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