When the level of employment is 120 million, the economy produces a real GDP of $11,500 billion (point A).

It shows output levels for a range of employment between 120 million and 140 million workers. An economy operating on its aggregate production function is producing its potential level of output.įigure 8.5 'The Aggregate Production Function' shows an aggregate production function (PF). Diminishing marginal returns occur when additional units of a variable factor add less and less to total output, given constant quantities of other factors.įigure 8.An aggregate production function relates the total output of an economy to the total amount of labor employed in the economy, all other determinants of production (that is, capital, natural resources, and technology) being unchanged.

This example illustrates diminishing marginal returns. The next 10 million workers increase production by $300 billion to $12,300 billion at point C. Increasing employment from 120 million to 130 million, for example, increases output by $500 billion to $12,000 billion at point B. The shape of the aggregate production function shows that as employment increases, output increases, but at a decreasing rate. In drawing the aggregate production function, the amount of labor varies, but everything else that could affect output, specifically the quantities of other factors of production and technology, is fixed. A level of employment of 130 million produces a real GDP of $12,000 billion (point B), and when 140 million workers are employed, a real GDP of $12,300 billion is produced (point C). An aggregate production function relates the total output of an economy to the total amount of labor employed in the economy, all other determinants of production (that is, capital, natural resources, and technology) being unchanged.

Aggregate production function