Economic Laws of Equity and Efficiency Apply to the Aggregate Production Function
PROVEN STERLING
aboredhaEconomicLawsofEquityandEfficiencyApplytotheAggregateProductionFunction.docx
How Economic Laws of Equity and Efficiency Apply to the Aggregate Production Function
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Define and explain what aggregate production function is
Aggregate production function is used to describe how total real domestic product is dependent on the available inputs in an economy. It simply means that an increase in input results to a higher output. It depends on factors such as physical capital, labor, human, capital and social infrastructure. One of the properties of aggregate production function is that output increases with increase in labor, natural resources and physical capital which make up the inputs of production. Secondly, diminishing marginal product occurs when an increase in output occurs due to adding more inputs.
What does it include?
Aggregate production function includes several inputs. One is the physical capital which includes factory buildings and machinery. It allows for the production of an increased output of the end product. Secondly is the labor in terms of hours that are worked in the economy. Total labor hours are determined by the size of the workforce and the hours each individual is working. Human capital is the formal education and the training on job which lead to acquisition of skills. Natural resources are the factors of production such as land and oil. Social infrastructure is the total environment including political, legal and cultural that exist in an economy.
Describe each of the factors and what impacts it specifically has on productivity
One of the factors can be classified as the state of technology. Better technology results to an increase in production. Technology refers to all the inputs apart from labor, physical, and human capital. Physical capital, labor and natural resources are inputs that influence aggregate production function. Therefore, an increase in these factors leads to an increase in productivity. Natural resources are the factors such as land which influence production. An increase in these factors leads to an increase in productivity.
How do each of the factors interact with each other?
The interaction between physical capital, labor, and natural resources affect the levels of output. An increase in all these three factors results to an increase in output. This means that they have positive marginal products as inputs of production. However, when there is more of a factor, the increase in inputs result to lower outputs. As such, when there is more capital, an increase in additional capital results to lower output. The same applies for labor and natural resources. Increase in human capital, knowledge and social infrastructure lead to an increase productivity.
What countries would relate to the following examples: LDC (Less Developed Countries); NI (Newly Industrialized); and D (Developed?)
The newly industrialized countries are most likely to relate to the example of aggregate production function. This is because they are able to increase their GDP through varying various aspects of the input. The newly industrialized countries apply technology to be able to increase their output and hence enhance their growth. They invest in human and physical capital as well as government policies to enhance the pattern of convergence of economies. This is what leads to fast-growth economies.
