In other words the marginal products of labour and capital are both positive

In other words the marginal products of labour and

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input increases. In other words, the marginal products of labour and capital are both positive. Positive marginal products are quite natural properties of the production function, as this simply states that more inputs yield more output. Marginal Product of Labour Schedule for the Representative Firm This graph shows the representative firm’s marginal product of labour schedule. This is a graph of the firms marginal product, given a fixed quantity of capital, as a function of the labour input. The marginal product of labour declines as the quantity of labour used in the production process increases. The marginal product schedule is always positive and is downwards sloping.
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Adding Capital Increases the Marginal Product of Labour For each quantity of the labour input, the marginal product of labour increases when the quantity of capital used in production increases. This figure shows that an increase in the quantity of capital from K 1 to K 2 shifts the marginal product of labour schedule to the right, from MP 1 N to MP 2 N . The Effect of a Change in Total Factor Productivity Production Function An increase in the total factor productivity has two effects: More output is produced given each quantity of labour input, and the marginal product of labour increases for each quantity of the labour input, and the marginal product of labour increases for each quantity of labour input. EG: You still have the same amount of workers but their productivity has increased and therefore their output will be greater per value of input. Changes in total factor productivity, z , are critical to the understanding of the causes of economic growth. An increase in total factor production has two effects. Firstly, because more output can be produced given capital and labour inputs when z increases, this shifts the production function up. Secondly, the marginal product of labour increases when z increases. This is
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reflected in the fact that the slope of the production function when z = z 2 is higher than when the slope is given as z = z 1, for any given quantity of the labour input, N d . The Effects of an Increase in Total Productivity on the Marginal Product of Labour When total factor productivity increases, the marginal product of labour schedule shifts to the right. This figure illustrates a shift to the right in the marginal product of labour schedule from MP1N to MP2N when z increases. An increase in z has a similar effect on the marginal product of labour schedule to an increase in the capital stock. Profit Maximisation When firm’s maximise profits, the marginal product of labour equals the real wage and therefore MPN = w. The representative firm behaves competitively, it takes real wage as given, which is the price at which labour trades for consumption goods. The goal of the firm is to maximise profits, given by Y – wN d , where Y is the total revenue that the firm receives from selling output, in units of the consumption good, and wN d is the total real cost of the labour input or the total real variable costs. Then, substituting for Y using the production function Y = zF(K, N d ).
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