In real life, it is feasible that a change in one factor's supply will affect the other factor's marginal product. For instance, an increase in K or L might also result in an increase in MPK.
An output-to-input conversion method is used in production. The aggregate production function, denoted by the equation Y = F(K,L), is introduced in this chapter. It states that overall economic output, or Real GDP (Y), is a function of the total quantity of capital and labour used by businesses during the production process.
The marginal products of K and L are increasing but diminishing. In other words, Y grows as K or L increases (positive marginal product), but as K or L increases, the marginal increase in Y produced by utilising additional K or L decreases.
The capital demand curve moves to the right and the equilibrium (R/P) increases if MPK increases at any given K for whatever reason. The capital demand curve moves to the left and the equilibrium (R/P) decreases if anything happens to reduce MPK at any given K.
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