Production function models, Microeconomics

Assignment Help:

Production Function Models

A production function model, in particular, explains the interaction of variables in production. They treat production or growth as a function of such interactions. These types of models are used to examine, assess and estimate the relative weights of different variables and sub-variables in their interactive functioning and contribution to economic growth. A few economists from the Chicago School of Economics, U.S., used this approach in the late 1950s and early 1960s to examine the sources of economic growth in the United States.

One of the landmark studies in this genre was by Edward F. Denison in 1962. In a simplified framework, the technique adopted may be described as follows. Using the growth accounting technique, Denison explained the sources of economic growth in the United States during the period 1929 58. He accounted for the recorded rise in national income by balancing the factor shares of production with the total output produced. Since the effort was directed at accounting for growth over a period of time, the technique came to be known as the growth accounting approach. The Cobb Douglas Production Function Equation (known so for its development by Cobb, a mathematician from Cambridge, and Douglas, an economist from the United States) was used for the purpose.

The production function equation assumes that the quantity produced in a country is determined by the interplay of labour (L) and capital (K). Although these two, i.e. labour and capital, are considered as the main factors, there are other factors or variables which influence the relationship. As they could not be accounted explicitly, they are treated as a constant. Hence, Q, the quantity produced is the outcome of the interplay of ‘L’ and ‘K’ along with ‘other factors’ denoted by a constant ‘A’. The capital used in production included fixed capital such as land and circulating/perishable/consumable capital such as raw materials, machines, electricity, etc. In equation form, the relationship was expressed as:

a”1 -  a

Q = A . K . L  where

the symbol a (alpha), a constant, stands for the contribution of the capital K to national income. Since the total contribution of L and K is one (a unit), the contribution of L is (1 – a). The contribution of capital and labour as well as that of ‘A’ can be determined by solving for the parameters/constants (i.e. A and a) when time series data on the three variables L, K and Q are available.

 

 


Related Discussions:- Production function models

calculate price elasticity of demand and supply, 1. Calculate price ...

1. Calculate price elasticity of demand and supply for the following functions when (a) P=8 and (b) Q=6. i. P= 40 - 0.5Q ii. Q= -40 + 0.75P iii

Comparative economics system, Identify path of growth and development to ec...

Identify path of growth and development to economic maturity.

Fundamental unit of individual economic behaviour, Households: The fundamen...

Households: The fundamental unit of individual economic behaviour. Households offer labour supply to labour market, make consumer purchases,earn income (from employment and other s

Neoclassical economics, Neoclassical economics is dominant approach to econ...

Neoclassical economics is dominant approach to economics currently taught and practiced in most of the world (and particularly dominant in Anglo-Saxon countries). It attempts to ex

Explain the concept of land economic, (a) Give an overview of the Concept ...

(a) Give an overview of the Concept of Land Economic (b) Provide a definition of Land/Economics (c) Discuss the origin of Land Economics (d) Modern and Traditional Land Ec

ECON, why society has chosen the mixed economy

why society has chosen the mixed economy

Elasticity, Elasticity is a term broadly used in economics to signify the “...

Elasticity is a term broadly used in economics to signify the “responsiveness of one variable to changes in to another.” Types of Elasticity can be explained as follows: Th

Case study of growth of regional financial institutions, Case Study - EUROP...

Case Study - EUROPE   Let us now see how events unfolded over the decades in Europe that led to monetary unification in terms of a single currency and single central bank. At

Need Econ Help, Two firms produce a pollutant called Q. The total costs of...

Two firms produce a pollutant called Q. The total costs of reducing emissions of Q are as follows for Firm 1 and Firm 2, respectively: TC1=10+100Q12 TC2=20 + 50Q22. This means tha

Major air pollutants, Major air pollutants can be sub divided into 2 catexa...

Major air pollutants can be sub divided into 2 catexampleories: Inorganic gases and particular gases. (A) Inorganic gases 1. Carbon monoxide (CO) CO is a colourless, lethal gas

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd