7 - Some implications of variable returns to scale

Abstract

It is widely believed that the familiar two-dimensional locus of production possibilities becomes uniformly convex to the origin if returns to scale are increasing sufficiently strongly, but remains uniformly concave if returns are only weakly increasing. This chapter discusses that neither proposition is generally true. It is also part of received doctrine that when the production-possibility locus is conventionally concave, the output of a commodity in competitive equilibrium increases when its price increases, and that when the locus is convex, equilibrium output responds perversely to an increase in price. The chapter also discusses that in a context of variable returns, to scale neither statement is generally valid. Questions relating to the existence, uniqueness, and stability of competitive international equilibria, as well as many associated comparative statical issues, depend for their resolution on the truth or falsity of the propositions advanced.