From Firms to Industry: the Johansen Production Model

Abstract

As defined above, the production function refers to the micro decision making unit: for example the ‘firm’ or the ‘plant’. However, economists often use the notion of a production function to describe relationships between aggregates of some kind. These ‘aggregate production functions’ may refer to an ‘industry’ or a ‘sector’ or even to the whole economy and purport to represent the range of possible inputs of aggregate labour, and aggregate capital etc. capable of producing various levels of aggregate output.