The aggregate production function
Definition
Imagine the national economy during a short period of time (say one week). We refer:
- L: total amount of work used during this period (by all individuals in the economy).
- K: total amount of capital used.
- Y: total amount of finished goods produced during this period (real).
It is still the case that Y and L are flows whereas K is a stock. During a short period of time, we can presume that amount of capital is constant.
Aggregate production function, or simply production function is a function which relates L, K and Y. Precisely, we presume that Y is a function of L and K:
Y = f (L, K)
In most cases, we won't specify exactly what the function f looks like. Though we always presume that f is increasing in L and K, which is, when we use more labour and/or more capital, we would produce more goods.