An economy's output of good and serves (i.e. GDP) depends on - factors of production: its quantity of inputs - production function: its ability to turn inputs into outputs
The two most important factors of production are capital (K) and labor (L) The production function express how much output is produced from given amounts of capital and labor
The production function reflects the available technology: with a better way to produce a good, the technological change alters the production function. Many production functions have a property called constant returns to scale
To decide how the total income \(Y\) is distributed among labor and capital, the neo-classical theory of distribution combines two ideas
- the classical idea that prices adjust to balance supply and demand
- the idea that the demand for each production depends on the marginal productivity of that factor.
The marginal product of label (MPL) is the extra amonut of output the firm gets from one extra unit of lablr
 Mankiw's Macroeconomics