1. The production function tells us the amount of output that can be produced with any given quantities of capital and labour. The production function can be graphed asa relationship between output and capital, holding labour fixed, or as a relationship between output and labour, holding capital fixed. In either case, the production function slopes upward, implying that greater use of capital or labour leads to more output. A shift in the production function, which indicates a change in the amount of output that can be produced with given amounts of capital and labour, is called a supply shock,