4 - Production

Abstract

This chapter describes the production correspondence and laws of returns in production transformations. The change in the ratio of outputs to inputs from a change in inputs is regarded as returns to scale. In the limiting case of infinite returns, there is free production. If there is no change, the returns are precipitously decreasing. Between these two extremes, there are several possibilities. A deeper understanding of the relationship between returns to scale and the geometry of the production set is possible, but it requires the study of limiting processes. The same methods can be used to consider returns to nonproportional changes in factors of production. The case of two inputs and one output is similar. The production possibility set is now in three dimensions, and the graph of the production function is no longer a curve in two-dimensional space but rather a surface in three-dimensional space. This is often represented in terms of level curves in a two-dimensional space. A point in the factor space has coordinates representing the inputs of the two factors. The chapter illustrates isoproduct curves that indicate factor inputs giving equal production.