8. Aggregate Production and Productivity Flashcards
What are the 2 Factors in production?
Factors of Production (inputs) include:
- Labor (L)
- Capital (K)
What are Labor (L) and Capital (K) said to be?
Both factors are assumed to be exogenous and fixed over time.
What is the “aggregate production function”?
A description of how much output, Y, is produced for any given amounts of factor inputs:
What is the “aggregate production function’s” equation?
where F is the function that translates K and L into Y
What are two observations on the “production function”?
- Two observations on a production function:
- An efficient, developed economy generally produces more with the same quantity of capital and labour than an inefficient, primitive economy
- The shares of labour and capital income in the U.S. economy have remained relatively constant over time at about 70% labour and 30% capital
What is the “Cobb-Douglas Production Function”?
–> where A describes productivity (total factor productivity)
Why are there powers on the “Cobb-Douglas Production Function”?
Powers on capital on capital and labor represent the share of income that goes to the particular FOP “The shares of labour and capital income in the U.S. economy have remained relatively constant over time at about 70% labour and 30% capital”
Assume that every citizen works, so that per capita income is the same as average income (output) per worker, Y/L. The equation to demonstrate Income per worker becomes:
–> where k is capital per worker
k/l = capital per worker (or GDP per worker)
–> conclusion is, if i take a look at this model, two different countries and look at their GDP per capita, it can differ based on our model, because of two reasons:
1. Total factor productivity is different
2. Capital stock per capita is different
What impacts per capita income more, “capital per person” or “productivity”?
The shortfall of per capita income in other countries relative to the United States is due more to lower productivity than it is to lower amounts of capital per person
What are the two characteristics of “Cobb-Douglas Production Function Characteristics”:
- Constant returns to scale
- Diminishing marginal product
What does the “constant returns to scale mean”?
Constant returns to scale can be shown by doubling both Capital (K) and Labour (L) into the previous production function so that:
(If a production is working, you can scale up as much as you want.)
What is “diminishing marginal product”?
Diminishing marginal product means that as the amount of one factor input increases, holding other inputs constant, the increased amount of output from an extra unit of the input (its marginal product) declines
What is a “supply shock”?
A supply shock is a change in the output an economy can produce from the same amount of capital and labor
- Positive (favorable) supply shocks
- Negative (adverse) supply shocks
What are some types of “supply shocks”?
- Technology shocks
- Natural environment shocks
- Energy shocks
What is the difference between “nominal” and “real” economic profits?
The REAL profit takes inflation into account, the nominal profit does not.
What does “profit maximization” imply?
Profit maximization implies:
firms demand a quantity of each factor of production (capital and labor) up until the marginal product of that factor falls to its real factor price
