01:220:103 Lecture Notes - Lecture 26: Economic History, Capital Accumulation, Diminishing Returns
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23 May 2019
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Economic growth shifts society"s production possibility frontier up and to the right. The production possibility frontier shows all the combinations of output that can be produced if all society"s scarce resources are fully and efficiently employed. Economic growth expands society"s production possibilities, shifting the ppf up and to the right. In the absence of increases in the capital stock, as labor increases, less and less output will be added by each new worker. This effect is called diminishing returns: with diminishing returns, as labor supply grows, output increases but at a declining rate, and increases in the labor supply reduce labor productivity, or output per worker. Economic growth from an increase in labor: more output but diminishing returns and lower. Economic growth from an increase in capital: more output, diminishing returns to added. Observe that (1) additional capital increases labor productivity and (2) there are diminishing returns to capital.