Increasing Returns to Scale
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Until now, we have always assumed linear production functions. That is a rather restrictive assumption. Textbooks of economic analysis are full of continuous and differentiable production functions, which are obviously non-linear. Some of this may be explained away as being approximated as a piecewise broken linear function. In particular, one suspects that the much discussed Law of Diminishing Returns in fact refers to alternative processes. At any level of demand, the collection of operated processes will consist of the most efficient ones that are available at a particular point in time. These relatively efficient processes may have limited capacities and an increase in demand may have to be sustained by the use of less efficient processes, for example, by having done the work in other places, involving transport costs.
KeywordsCash Flow Capital Good Full Capacity Economic Planning Price Structure
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