Non-Linear Production Theory

Abstract

Non-linear theories of the firm stem very much from the work of the neoclassicists. Its very non-linearity is both a gain and a limitation. It is a gain in the sense that it introduces a greater realism at the firm level, but it is a limitation in the sense that it is almost impossible to generalise to the economy level. The non-linear approach rests almost wholly 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. We have already seen hi the theory of consumer behaviour that the margin was central in discussions of marginal utility and the marginal rate of substitution. In the theory of the firm also the margin plays a central role in marginal product, marginal rate of technical substitution, and marginal cost.