ECO 365 Week 4 participation The Production Function

ECO 365 Week 4 participation The Production Function

In this chapter we want to understand the theory of labor demand. As we discuss in another thread, the demand for labor clearly depends on the demand for the goods and services produced by labor. But that is not the only factor that affects how many people are employed by a firm. The productivity of labor is also important.  

 Let's think about the production function and how it relates to the marginal productivity of labor. See section 18-1b of your textbook. The production function indicates the relationship between the amount of inputs (i.e., resources) and the amount of output in production. We can determine the marginal productivity of labor by changing the amount of labor input (e.g., number of hours or people with the same skills) and observing the change in the number of units produced. So we change the number of units of labor (while maintaining the amount of all other resources unchanged) and observe the change in output. 

 Class, see an example of the production function in Figure 2 of Chapter 18. Notice that as the quantity of labor input increases, the quantity of output increases. But the relationship is not a straight line. The graph bends. Why? See section 18-1b.