Investment Alternatives and the Supply Schedule of the Firm

Abstract

The traditional theory of production and cost in the short-run rests squarely on the of proportions. The basic conception is simple but persuasive. A firm desiring to adjust output to changed conditions of demand (price) is assumed to have, effectively, only one course of action open to it. That is, the firm can vary the amount of variable service used in conjunction with the complex of fixed elements constituting the plant and, in this way, produce greater or lesser output. Production is, of course, subject to the technical relations specified by the short-run production function and the normal presumption is that declining marginal productivity (increasing marginal cost) will be encountered, beyond some point, as more and more of the input is employed relative to the fixed factor. Since the firm's objective is taken to be net revenue maximization, the short-run supply schedule must be derived consistently; the schedule emerges, simply, as a particular range of the marginal cost curve. This familiar explanation gives rudimentary insight into certain problems of the firm, but there can be no doubt that much is left unsaid and unexplored. Moreover, the of diminishing returns itself occupies a peculiar position in the theory. In one construction, the law seems to be a straightforward generalization on the technical relationships of production under conditions where one input is rigidly fixed in type, amount and physical form. Here, we expect