Production Function and Total Factor Productivity

These flashcards cover key vocabulary and concepts related to the production function and total factor productivity in economics.

Production Function

A mathematical relationship that specifies the maximum output attainable from given quantities of inputs.

Factors of Production

Inputs used in the production, commonly labor and capital.

Total Factor Productivity (TFP)

Efficiency with which all factors of production are utilized in generating output, representing the part of production not explained by capital and labor.

Solow Residual

A term used to describe total factor productivity, referred to by economist Solow as a 'measure of our ignorance'.

Returns to Scale

A property of a production function that describes how output changes when all inputs are scaled by the same proportion.

Constant Returns to Scale

A situation where doubling inputs results in a doubling of output.

Decreasing Returns to Scale

Occurs when increasing inputs leads to a less than proportional increase in output.

Increasing Returns to Scale

Occurs when increasing inputs leads to a greater than proportional increase in output.

Cobb-Douglas Production Function

A specific functional form of the production function represented as K^a * L^(1-a), where a is a parameter between 0 and 1.

Perfect Substitutes in Production

Production function where inputs can be substituted for one another at a constant rate, represented as K + L.

Perfect Complements in Production

Production function where inputs must be used in fixed proportions, represented as min{K, L}.

Factor Augmenting Productivity

Efficiency with which a specific factor of production is utilized in generating output.

AK (Capital Augmenting)

A term in production functions representing the direct increase in the productivity of capital.

AL (Labor Augmenting)

A term in production functions representing the direct increase in the productivity of labor.

Assumption of Constant Returns to Scale

The intuitive idea that replicating the same production process yields the same results.

Non-scalable Inputs

Inputs not easily increased with the scale of production, such as managerial or specific skills.

Positive Externalities

Benefits that arise from increased production and learning from team members.

Mathematical Notation

The use of symbols and expressions to represent production functions, such as AF(K, L).

Elasticity of Substitution

A measure of how easily one input can be substituted for another in production.

Constant Elasticity of Substitution (CES)

A family of production functions that allows for varying elasticity of substitution between inputs.

Influences on TFP

Broad factors such as technology, management practices, culture, and political frameworks affecting output.