On your first question, it’s not an oversimplification but a stipulation made in the concept of the production structure for analytical purposes. If one did not make such a stipulation, then the capital structure would encompass all acts of production since the beginning of human history. Then the highest stage of production, i.e., the first stage of production, would involve only labor and natural resources. But we wish to use the production structure to analyze the existing processes of production. So we stipulate that the highest stage of production is the extraction of natural resources even though it involves the use of prior produced capital goods and not just labor and natural resources themselves.
On your second question, the length of the production structure is the time it takes to perform all the stages of production from the highest to the lowest. Additional saving and investing adds stages to the production structure and thereby lengthens it out in time. For example, let’s say additional saving-investing will be directed by entrepreneurs into new factories to produce consumer goods. In order to increase their production, natural resources must be diverted to producing factories instead of moving down the existing production structure to produce consumer goods. To extract raw material and use them to first produce factories and then extract more raw materials and use them to produce consumer goods with the new factories takes more time. There may, in fact, be more factories built in the various stages throughout the production structure, but the overall structure must be lengthened by additional saving-investing.
A clarifying note: in Rothbard’s trapezoid diagrams illustrating this process, each stage represents the monetary value of all expenditures in that stage. Therefore, even though the monetary expenditures shrink in the lower stages to make room for additional higher stages, the physical amount of goods produced in each stage can be increasing. The entire purpose of saving-investing and lengthening the production structure is to produce more consumer goods in the future even though the total expenditure on consumers goods declines. This is made possible by falling prices for consumer goods. The same processes can occur at other stages as well, e.g., more factories to produce consumer goods even though the total expenditures on factories declines. (Rothbard is stipulating that the additional saving-investing is taking place without any change in the total demand for or the total stock of money, i.e, total spending on all goods stays the same. Therefore more spending on higher stage capital goods necessitates less spending on lower stage capital goods and consumers goods.)