chapter  4
14 Pages

The production function concept of technological change

One method for evaluating the effect of technological change on production is in terms of changes in the amount of capital (K ) and labor (L) used in production, assuming of course that K and L are the only two factors of production. We recognize that intermediate materials and services, and even money, are also utilized in producing goods and services. For expositional purposes, we focus on these two inputs only. The simplest classification scheme assumes that technological change alters the input mix for a given level of output. For a given level of output and input price ratio, a labor-saving technological change results in a higher capital-to-labor ratio; a capital-saving technological change results in a lower capital-to-labor ratio; and a neutral technological change results in an unchanged capital-to-labor ratio.