Aggregate Production Function - Explained
What is an Aggregate Production Function?
Written by Jason Gordon
Updated at March 27th, 2023
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What is an Aggregate Production Function?
The aggregate production function is the maximum output that can be produced given the quantities of the factors of production.
Note that, in what follows, lower case letters refer to plant level variables while the corresponding capital letters refer to aggregate variables. Let output be denoted by Y, the capital service input by K, and the labor service input by N. We normalize so that K units of capital can provide K units of capital services. With this normalization we can then refer to both the capital stock and services of the capital stock by K. We normalize N in the analogous way. The aggregate production function F is then
Y = F(K, N).
This function displays the following three properties: the function
- is increasing (possibly weakly),
- displays constant returns to scale,
- and displays diminishing returns.
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