Worth: Mankiw Economics 5e 44 PART 11 Classical Theory: The Economy in the Long Run determines their level of production(and, thus, the level of national income) Then we examine how the markets for the factors of production distribute this income to households. Next. we consider how much of this income households consume and how much they save. In addition to discussing the demand for goods and services arising from the consumption of households, we discuss the demand arising from investment and government purchases Finally, we come full circle and examine how the demand for goods and ser- vices(the sum of consumption, investment, and government purchases)and the supply of goods and services(the level of production)are brought into balance 3-1 What Determines the Total Production of Goods and services? An economys output of goods and services--its GDP-depends on(1)its tity of inputs, called the factors of production, and(2) its ability to turn nto output, as represented by the production function. We discuss each of In tur The Factors of production Factors of production are the inputs used to produce goods and services.The mportant factors of production are capital and labor. Capital is the set of tools that workers use. the construction worker's crane the accountant's calcu- lator, and this author's personal computer. Labor is the time people spend work ing. We use the symbol K to denote the amount of capital and the symbol Lto In this chapter we take the economy's factors of production as given. In other words, we assume that the economy has a fixed amount of capital and a fixed amount of labor. We write L The overbar means that each variable is fixed at some level. In Chapter 7 we ex amine what happens when the factors of production change over time, as they do in the real world. For now, to keep our analysis simple, we assume fixed amounts of capital and labor. We also assume here that the factors of production are fully utilized-that is, that no resources are wasted. Again, in the real world, part of the labor force is unemployed, and some capital lies idle. In Chapter 6 we examine the rea- sons for unemployment, but for now we assume that capital and labor are fully em User JOENA: Job EFF01419: 6264_ch03: Pg 44: 24980#/eps at 1009 IllI ed,Feb13,20028:554MUser JOEWA:Job EFF01419:6264_ch03:Pg 44:24980#/eps at 100% *24980* Wed, Feb 13, 2002 8:55 AM determines their level of production (and, thus, the level of national income). Then we examine how the markets for the factors of production distribute this income to households. Next, we consider how much of this income households consume and how much they save. In addition to discussing the demand for goods and services arising from the consumption of households, we discuss the demand arising from investment and government purchases. Finally, we come full circle and examine how the demand for goods and ser￾vices (the sum of consumption, investment, and government purchases) and the supply of goods and services (the level of production) are brought into balance. 3-1 What Determines the Total Production of Goods and Services? An economy’s output of goods and services—its GDP—depends on (1) its quan￾tity of inputs, called the factors of production, and (2) its ability to turn inputs into output, as represented by the production function.We discuss each of these in turn. The Factors of Production Factors of production are the inputs used to produce goods and services.The two most important factors of production are capital and labor. Capital is the set of tools that workers use: the construction worker’s crane, the accountant’s calcu￾lator, and this author’s personal computer. Labor is the time people spend work￾ing.We use the symbol K to denote the amount of capital and the symbol L to denote the amount of labor. In this chapter we take the economy’s factors of production as given. In other words, we assume that the economy has a fixed amount of capital and a fixed amount of labor.We write K = K _ . L = L _ . The overbar means that each variable is fixed at some level. In Chapter 7 we ex￾amine what happens when the factors of production change over time, as they do in the real world. For now, to keep our analysis simple, we assume fixed amounts of capital and labor. We also assume here that the factors of production are fully utilized—that is, that no resources are wasted.Again, in the real world, part of the labor force is unemployed, and some capital lies idle. In Chapter 6 we examine the rea￾sons for unemployment, but for now we assume that capital and labor are fully employed. 44 | PART II Classical Theory: The Economy in the Long Run