The right model to use when thinking about the short-run
effect of productivity on output is the aggregate supply and
aggregate demand model, AS/AD, because their interaction
determines both output and prices in the short run. This model is
shown in the graph. The intersection of AS and AD determines the
current level of output and prices. How will these curves move in
response to an increase in productivity?
- How do you think the AS curve will respond to an increase
in productivity ?
- What is the effect of an increase in productivity on
output if only the AS curve responds ?
The increase in productivity can have two causes:
- Productivity increases due to a widespread implementation
of a major technological breakthrough, implying future
growth in output and income.
- Productivity increases due to more efficient use of
existing technologies and the possible elimination of
jobs.
- How is the first scenario likely to affect the AD curve ?
- How is the second scenario likely to affect the AD curve ?
- Assume the first scenario: output rises unambiguously.
What happens to employment ?