Aggregate Production Function
The aggregate production function represents the relationship between the total output of an economy and the inputs used in production, such as labor and capital. It is a key concept in macroeconomics and is used to analyze the overall productivity and efficiency of an economy. The aggregate production function helps economists understand the factors that contribute to economic growth and development.
8 Key excerpts on "Aggregate Production Function"
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...CHAPTER FIVE The Production Function, Productivity, and Productivity Growth The production function relates the rate of production to the state of technology and the employment of the factors of production. It is arguably the most important function in the neoclassical paradigm because: (1) It is the basis of the cost functions. (2) Its slope, the marginal productivity function, is the foundation of the factor demand functions. (3) And with factor supplies given, marginal productivity functions yield the distribution of income to the factors of production. In a general sense, the production function represents very practical and well-known relationships implicit in all employment change decisions made by managers to vary the rate of production. The analysis used in the area of production closely parallels that used in the basic neoclassical models of consumer behavior. Marginal productivity analysis, to be used here, is very much like marginal utility analysis previously covered. The same is true of the close relationship between the isoquant analysis of this chapter and the previously presented indifference curve analysis. Finally, an increasing standard of living, a common aspiration in acquisitive societies, essentially requires advances in technology and productivity, which shifts the production function. The Production Function The production function is defined as follows: The production function relates the maximum rate of production possible, Q, to the employment of the factors of production—labor, L, and capital, K —at a given level of technology, T : Q = f(T; L,K). Why the omission of the third factor of production, land or natural resources? The answer rests on David Ricardo’s definition of land as “the original and indestructible powers of the soil.” Once a unit of land is worked on by labor or capital, it is no longer in its original or natural state. This transforms land into capital, the produced means of production...
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...The functionF() embodies the fact that capital and labor can be used in various combinations to produce output.In this production function,Ais a multiplicative scale factor referred to astotal factor productivity (TFP). Note that an increase in TFP implies a proportionate increase in output for any combination of inputs. Hence, TFP reflects the general level of productivity or technology in the economy. The state of technology embodies the cumulative effects of scientific advances, applied research and development, improvements in management methods, and ways of organizing production that raise the productive capacity of factories and offices.It is worth noting that both the functionF() and the scale factorAreflect technology. An innovation that makes it possible to produce the same output with the same amount of capital but fewer workers would be reflected in a change in the functionF() because the relative productivity of labor and capital has been altered. In contrast, an increase in TFP does not affect the relative productivity of the inputs. As is standard in the analysis of economic growth,unless stated otherwise, the level of technology should be interpreted as referring to TFP.In order to obtain concrete results, it is useful to use a specific functional form for the production function. TheCobb–Douglas production function, given by:(11-2)is widely used because it is easy to analyze and does a good job of fitting the historic data relating inputs and output. The parameter α determines the shares of output (factor shares) paid by companies to capital and labor and is assumed to have a value between 0 and 1. The reason for this follows from basic microeconomics. In a competitive economy, factors of production are paid their marginal product. Profit maximization requires that the marginal product of capital equal therental price of capitaland the marginal product of labor equal the (real) wage rate...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...2 The economics of production Plate 2.1 The economics of production Synopsis This chapter explores the physical production process. It describes the physical relationship between inputs and outputs, and describes the economics of transforming inputs into products; resources into goods. The production function is defined and explained. Next, the effect of time on production is investigated by defining the immediate, short, and long runs. The role of physical production relationships is highlighted, with definitions for constant, increasing, and decreasing returns. Technological change and the law of diminishing marginal returns are defined and explained to enhance understanding of examples from food and agriculture. 2.1 The production function The production of goods and services is a logical place to begin studying the economics of agricultural production. During the production process, firms (also called producers) combine inputs into outputs for sale to consumers. The process can be quite complex, so the next several chapters discuss the production activities undertaken by firms. The discussion then shifts to the behavior of consumers, or households. All of this leads to consideration of the interactions of consumers and producers in markets. Production is the process of producing goods and services. This process requires scarce resources. As seen in Chapter 1, inputs have several different names: (2.1) Inputs = factors = factors of production = resources = A, L, K, and M. Quick Quiz 2.1 What do the letters A, L, K, and M refer to? 2.1.1 Wheat production in the High Plains of North Dakota Consider a wheat producer in North Dakota, a leading wheat-producing state in most years...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Chapter 2 The economics of production Photo 2.1 The economics of production Source: Satin/Shutterstock Abstract This chapter explores the physical production process. It describes the physical relationship between inputs and outputs and describes the economics of transforming inputs into products: resources into goods. The production function is defined and explained. Next, the effect of time on production is investigated by defining the immediate, short, and long runs. The role of physical production relationships is highlighted, with definitions for constant, increasing, and decreasing returns. Technological change and the law of diminishing marginal returns are defined and explained to enhance understanding of examples from food and agriculture. 2.1 The production function Agricultural production is a logical place to begin the study of the economics of agriculture. During the production process, firms (also called producers) combine inputs into outputs for sale to consumers. The process can be quite complex, so the next several chapters are devoted to the production activities undertaken by firms. The discussion then shifts to the behavior of consumers, or households. All of this leads to consideration of the interactions of consumers and producers in markets. Production is the process of making goods and services. This process requires scarce resources. As seen in the previous chapter, inputs have several different names: (2.1)Inputs = factors = factors of production = resources = A, L, K, and M. QUICK QUIZ 2.1 What do the letters A, L, K, and M refer to? 2.1.1 Wheat production in the high plains of North Dakota Consider a wheat producer in North Dakota, a leading wheat-producing state in most years...
eBook - ePub- Enrico Colombatto(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Indeed, it is not surprising that most academic work in these areas pays lip-service to theory and tends to concentrate on statistical comparisons within and across industries. Yet, the systematic grid offered by the analysis of production is not altogether futile. First, it helps us appreciate that the economics of growth (increasing output) is not just a matter of finding out a mathematical formula that fits the data (see also Chapter 10). Certainly, a practitioner knows better than an economist and even if one lacks the insight or the information to formulate the production function properly, factors such as competition, ingenuity, imitation, and trial and error would help us articulate sensible explanations of what happens in the world of production. However, and despite its methodological shortcomings, traditional analysis makes the observer aware of three important issues. One is growth stricto sensu. The engine of growth is indeed the production function f, which shows that output increases as larger quantities of inputs are employed. Nonetheless, history suggests that in order to understand growth, one should pay less attention to how the manager applies a given production function and more to how production functions change; how scientific breakthroughs are transformed into productive blueprints and operational processes; how quickly engineers adopt them; and how deeply the institutional context – protection of private property rights, contract enforcement, taxation and regulation – affects the speed of change. After all, today's living standards are not higher than a century ago because the world has become more crowded, or because people are working harder, or because the Otto combustion engine has become more popular...
eBook - ePubProduction and Cost Functions
Specification, Measurement and Applications
- Erkin Bairam, Erkin Bairam(Authors)
- 2018(Publication Date)
- Routledge(Publisher)
...Many economists and econometricians tend to interpret the financial data provided by accountants from the viewpoint of neo-classical economic theory. Due to the difficulties associated with operationalising this theoretical approach significant problems arise in econometric work in comparing facts with theories. An alternative approach to understanding the nature and properties of production, cost and profit functions based upon accounting measurements is outlined in this chapter. Basic concepts are defined at the most micro-economic level in terms of observable (and measurable) variables. It is shown how this characterization supports a general statistical understanding of production, cost and profit functions and how it relates to the problem of aggregation. II. Production and Cost Functions in Economic Theory The term ‘production function’ in economic theory is usually associated with the description of hypothetical physical input-output relationships, i.e. the variables described by the particular theory are expressed in non-financial measurements. The general functional specification is O = f (I i), i = 1 t o n (1) where O is a physical output measure and the I i are physical input measures. 6 In theoretical analysis the inputs are often restricted to two different kinds, denoted L and K to stand for ‘labour’ and ‘capital’ respectively. An example of one such theory is the so-called ‘Cobb-Douglas’ production function, O = A (t) L α K β (2) Here A(t) is a time dependent ’scale parameter’ which supposedly denotes a technological progress variable and α and β are further parameters affecting the shape of the relationship between the dependent and independent variables. 7 Many other specific forms of production functions have been discussed theoretically and examined econometrically...
eBook - ePubEconomic Systems Analysis and Assessment
Intensive Systems, Organizations,and Enterprises
- Andrew P. Sage, William B. Rouse(Authors)
- 2011(Publication Date)
- Wiley-Interscience(Publisher)
...We will use the symbol q to denote the (scalar) output quantity. We assume that x i is the i th input quantity to the production process. Thus x i represents the various input resources or input factors to the production process. These resources will generally be of three distinguishable types 1. raw materials or natural resources (traditionally often denoted by M), 2. capital, such as investment in production machinery (traditionally often denoted by K or C), and 3. labor (traditionally often denoted by L). In many economic studies, particularly traditional ones, only an economic and technological valuation of these inputs is attempted. However, it is becoming increasingly recognized that psychological, social, and political valuations are of great importance. In our later chapters we will consider these to some extent, although a full development of a behavioral theory of the firm is, while very important, beyond the scope of this book. The production function, traditionally denoted by f, is a specific mapping or technological relation between the input variables x i and the production process and the output quantity produced, denoted by q. The specific mapping chosen is that presumably unique number that represents the maximum output that can be produced for a given set of input quantities. Example 2.1: If we have two input factors x 1 and x 2 to the production process, then we say that the product output level or quantity of production q is, for the i th production technique P i i, (2.1) We define the following: the output product q is the number of suits of clothing manufactured; x i are the input factors, such that x 1 is the number of hours of input labor to the manufacturing process and x 2 the number of square meters of input fabric; and a i are the coefficients of production, such that a 1 is the number of hours of labor needed to make a suit and a 2 the number of square meters of fabric necessary to make a suit...
eBook - ePubInnovation, Knowledge and Growth
Adam Smith, Schumpeter and the Moderns
- Heinz D. Kurz(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...5 On the growth of knowledge about the role of knowledge in economic growth A critical assessment of recent literature on growth theory 1 The empirical element in economic theory – the only part which is concerned, not merely with implications but with causes and effects, and which leads therefore to conclusions which, at any rate in principle, are capable of verification – consists of propositions about the acquisition of knowledge. (Hayek 1937: 33) 5.1 Introduction After Paul Romer had discovered that his earlier formalisations of growth theory were incompatible with the assumption of the non-rivalry of a good, what he called ‘research’, he wrote that this blunder may seem a trifling matter in an area of theory that depends on so many other short cuts. After all, if one is going to do violence to the complexity of economic activity by assuming that there is an Aggregate Production Function, how much more harm can it do to be sloppy about the difference between rival and nonrival goods? (Romer 1994: 15–16) The question is certainly justified, and Romer’s answer was perfectly clear: the damage arising is major. But ‘sloppiness’ already seems to have become endemic in this sub-discipline. As the same Romer stated two years later: Only 30 years ago many economists still objected to a mathematical statement of the relationship between output and capital in terms of an Aggregate Production Function and an aggregate stock of capital, Y = f(K, L) (Romer 1996: 202; my emphasis) Things have changed since then. The long-standing proof that an Aggregate Production Function does not exist in the sense that it is consistently derived from micro-information on production processes is, in Vienna-speak, no longer even ignored by many representatives of the discipline. 2 Today the demand for the ‘microfoundation’ of economic analysis is often treated as fulfilled when the argument makes use of the artifice of the representative, fully informed and immortal agent...
