Answer to Question #80681 in Macroeconomics for Kelvin

Question

Explain the concept of an aggregate production function. How would you expect the production function to be affected by an increase in the average and marginal productivity of labor for a given output level, owing, for example, to increased education of the labor force? How would such a shift in the production function affect the levels of output and employment in the classical model ?

Answer 1

The aggregate production function measures the output produced in an economy with a given amount of labor and capital. The aggregate production function has an upward slope implying that an increase in labor and capital results in increased output. However, as we move from left to right, the slope of the curve decreases indicating that for a fixed capital level increase in labor increases output with a smaller proportion and vice versa.
An increase in the education levels of the labor force increases the average and marginal productivity of labor and hence productivity in the economy rises. Therefore, an increase in education levels of the labor force shifts the aggregate production function to the left. The shift of the production function to the left increases the output level but does not affect employment levels in the economy.