Abstract
This chapter discusses the nonlinear production theory. Nonlinear theories of a firm stem from the work of the neoclassicists. Its nonlinearity is a gain and a limitation. It is a gain because it introduces a greater realism at the firm level but it is a limitation in the sense that it is impossible to generalize to the economy level. The nonlinear approach rests on the differential calculus as its tool of analysis. This is not hard to understand when one realises that the margin is no more than the first derivative of a function. In the theory of the firm, the margin plays a central role in marginal product, marginal rate of technical substitution, and marginal cost. The central character in the nonlinear theory of production is the production function. A production function denotes the maximum output that can be obtained from a set of inputs. It is a function in the mathematical sense because it is assumed that to each set of inputs there is a unique maximum output.
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