So at this real wage, workers are supplying just the quantity of labor that they want to and firms are hiring just the quantity of labor they want to. Everyone is happy. We call this potential output the economy s maximum sustainable output. It is also known as natural rate of output. Farmland has to have a fallow time.
Machines have to be shut down for maintenance.
Plants have to shut down for cleaning and re-tooling. Potential Output depends on the supply of labor and the productivity of that labor. The household decides whether to work or not. This affects the supply of labor. Because of gains in technology and improvements in physical and human capital, worker productivity per hour has increased.