Econ 4001 1st Edition Lecture 8Outline of Last Lecture II. Income and Substitution Effects- Price IncreaseIII. Several Famous Economistsa. Alfred Marshallb. John Hicksc. EvgenySlutskyIV. Consumer SurplusV. Network Externalities: Impact on DemandVI. Empirical Estimation of DemandVII. Producer Theory- Rebuilding the Supply Sidea. Boundaries of the Firmb. Production Technologyc. Types of Input for FIrmsVIII. Simplified Production FunctionOutline of Current Lecture IX. Average Product and Marginal ProductX. Example Using Thomas Malthus’ TheoryXI. Perspectives on Malthus’ TheoryXII. Analysis on the Productivity of LaborXIII. Factors that Affect Labor ProductivityXIV. Production with Two Variables- Adding Capitala. Definition of an IsoquantXV. Shape of IsoquantsXVI. Diminishing Marginal Returns SummaryXVII. Input SubstitutionXVIII. Moving along the IsoquantCurrent Lecture- Average product and Marginal producto Average product: total output divided by total usage of a particular inputo Marginal product: additional output produced by the latest unit of inputo When MP>AP, AP must be risingo When MP<AP, AP must be fallingThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Example: Food Prices and Productivity according to Malthuso Thomas Malthus (1766-1834) predicted population growth would lead to povertyand starvationo Malthus process: decreasing returns to labor input as population grows-AP must eventually declineo Eventually, each person would not be able to grow enough food to feed himself/herselfo His model was based on static agricultural productivityo Didn’t consider the huge amounts of land available for crops in the Americas, Australia, and Africao However, he didn’t consider that we could genetically modify crops and produce on a grand scale, when he was alive, one seed would only yield three new seeds whereas today, one seed can yield hundred of new seedso US crop yields have increased greatly over the last 100 years- Differing Perspectives on Malthuso Everyone agrees Malthus has been wrong about food production in the last 200 yearso Pessimists qould say Malthus has been wrong so far but he may still be right at some point in the futureo Optimists would say human capacity for innovation suggests Malthus will never be right- Broadening the Analysis-Productivity of all Laboro Labor productivity is defined as total physical output divided by total labor outputo Labor productivity can be calculated for a firm, a whole sector of the economy, orthe economy as a wholeo There are no $$ in this calculation- it is measured in units of inputs and outputs- Factors that affect labor productivityo The amount and quality of capital available for use Age and condition of the capital stock is key Capital employed per worker is an important statistico The efficiency with which that capital is employed Well-trained and experienced workers are more productive Maintenance of equipment and machineryo Technological Change This will always serve as an impact on labor productivity- Production with two Variables- Adding Capitalo As we add more capital to our process, labor becomes more productive- output per worker increaseso Isoquant: “a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs.”o Isoquant Map: looks a lot like an indifference curve/curves away from the origin due to decreasing marginal returns- Shape of Isoquantso Starting from the situation with little or no capital, first capital employed is very productive: so, I can reduce labor input a lot in exchange for a little bit of capital- Diminishing Marginal Returns Summaryo We see diminishing marginal returns to labor input as the amount of labor employed increases both in the one factor case and the two factor caseo We see diminishing marginal returns to capital input as the amount of capital employment increases- Input Substitutiono Marginal rate of technical substitution (MRTS): defined as the amount by which one input can be reduced when one extra unit of another input is addedo If we add labor, increase in output is MPL* change in laboro Decrease in output from cutting capital is MPK*change in capitalo Along an isoquant, change in quantity=0- Moving along the Isoquanto MRTS= -change in K/change in laboro MPL * change in labor= MPK * change in capitalo MRTS equals the ratio of the marginal products of labor and