Gdp is economy"s output of goods and services- depends on. 1- quantity of inputs, called factors of production. 2- ability to turn inputs into outputs, as represented by production function. K = capital, tools, machines, equipment etc (plant and equipment, but also includes inventories and residential housing) L = labour physical and mental efforts of workers. Available production technology determines how much output is produced from given amounts of capital and labour. Shows how much output and economy can produce fromk units of capital and l units of labour. Reflects economy"s level of technology, constant returns to scale. Assumptions: technology is fixed, economy"s supplies of capital and labour are fixed at. Output is determined by fixed factor supplies and fixed state of technology. Because supplies of capital and labour and technology are fixed, output is also fixed. K^2+l^2 ---- multiply both k and l by z, expand, and see if you are left with z(equation) -- constant.