Module 3 hand notes 2023f

Module 3 September 21, 2023 1:03 PM BEEDIE SCHOOL OF BUSINESS Bl 'S 207 SIMON FRASER UNIVERSITY LECTURE 3: PRODUCTIVITY AND COST ANALYSIS Productivity Growth is Good ®@Productivity measures output per unit of input(s), the most common being output per unit of labour @For firms and industries, productivity growth leads to lower unit costs, higher market shares and higher profits > Productivity advantages can lead to competitive advantage @For nations, productivity growth leads to higher GDP/capita, higher wages and higher standards of living > Productivity advantages can lead to comparative advantage

The Importance of Economic Growth ®Economic growth is important to the long- run wealth of a country @®Levels: In 1870, per capita GNP in the UK exceeded that of the US by 18%; by 1990 per capita GNP in the US exceeded that of the UK by 52% ©Growth: Between 1870 and 1990 the average annual growth rates of per capita GNP were: 1.37% (UK) and 1.85% (US) @Small differences in growth rates can result in significant changes in per capita income over time GDP Growth and Productivity jA[GDP per cap@=fl roductivity x Employment Rate} 4 GDP per capita (growth)= Productivity (growth) + Employment Rate (growth) 1996-2000 | 2000-2008 |2008-2019 GDP per capita (growth) : 06 Output per worker (growth) 2. 07 Employment/population (growth) 1. 0.1 Production Function A PRODUCTION FUNCTION indicates the maximum output (Q) that can be produced for every specified combination of inputs (K, L, ...); given the production technology, t. In the long-run, all inputs and parameters are variable: Q = f(KLt) In the short-run, technology and some input factors are fixed: Q = f(KLt) Kisfixed; tis fixed

Applications @The production function may be applied to most firms and organizations, industries and even countries, so long as outputs and inputs are clearly defined ®Traditionally, it has been used to describe industrial processes where capital and labour are combined to produce an output @®However, as industrial economies become transformed to service economies that rely heavily on knowledge and information, our use the production function must also change @In particular, the role of technology and technology transfer, R&D, and knowledge workers must be incorporated into the analysis of how goods and services are produced, and how they affect the rate of growth of output and productivity Productivity in the Short Run Q = f(KL), or @ = f(L) ok M & From this, we define the following: & W Q/L = Average Product of Labour (AP,) AQ/AL = Marginal Product of Labour (MP,) The Average Product of Labour is the most common measure of productivity for firms, industries, and nations. The "Law" of Diminishing Returns As the use of an input increases, with other inputs fixed, output initially increases at an increasing rate (increasing marginal returns); it then reaches a point at which additional units of the variable input will cause output to rise, but at a decreasing rate (decreasing marginal returns); and eventually it reaches a point after which output falls (negative marginal returns). Diminishing Negative c Marginal M:,gi"al Increasing Returns Returns Marginal Returns Short-Run Production ' : Function ' '