Components of the Aggregate Production Function In the first production function, shown in Figure 1 (a), the output is GDP. The inputs in this example are workforce, human capital, physical capital, and technology.

If this production function is graphed with Real GDP on the vertical axis and labor on the horizontal axis, and capital rises from 4 units to 6 units it would cause a O movement down along the same production function to a lower level of Real GDP.

When income taxes fall, the supply of labor curve shifts rightward, ultimately leading to the LRAS curve shifting leftward. You just studied 50 terms!

The different types of production function (as shown in Figure-16).

• Cobb-Douglas Production Function: Cobb-Douglas production function refers to the production function in which one input can be substituted by other but to a limited extent.
• Leontief Production Function:
• CES Production Function:

Four types of production

• 1) Unit or Job type of production.
• 2) Batch type of Production.
• 3) Mass Production or Flow production.
• 4) Continuous production or Process production.

According to economic theory, in the short- run, rational firms should only be operating in stage II. It is clear why stage III is irrational: the firm would be using more of its variable input to produce less output. However, it may not be as apparent why stage I is also considered irrational.

When the Marginal Product (MP) increases, the Total Product is also increasing at an increasing rate. This gives the Total product curve a convex shape in the beginning as variable factor inputs increase. When the MP becomes zero, Total Product reaches its maximum.

The relationship between TP and MP is explained through the Law of Variable Proportions. As long as the the TP increases at an increasing rate, the MP also increases. This goes on till MP reaches maximum. When TP increases at a diminishing rate, MP declines.

MP is the rate of TP (i.e., it measures the change in TP). When MP=0, there is no change (or addition) in TP. Implying that TP should be maximum when MP=0.

APS can be negative when the consumption is more than the national income but MPS cannot be negative. It is the ratio of the change in savings to the change in income. It refers to the slope of the saving function which is always positive due to the positive relationship between the 2 variables.