National Production
Overview
Production Function
The production function specifies that the amount of production in an economy
{% Y = F(K,L) %}
where
- L is the Supply of Labor
- K is the Amount of Capital
A common assumption for the production function is constant returns to scale. That is,
if you double both the capital and labor, you double the output.
{% aY = F(aK,aL) %}
Production Material Inputs
In a closed economy, the production function is stated without explicitly calling out the amount of raw material
or commodity inputs into the process. Of course, this is because in a closed economy, the raw material inputs
are extracted or produced by firms, and the amount of those inputs produced is directly related to the capital
and labor employed.
Of course, the amount of raw inputs available can dramatically affect production, and can be explicity called out
in the production function.
{% Y = F(K,L,C) %}
where C is now the amount of commodity input.
