Rudy,
Problems with the "diminishing returns" production function
wfirst raised to my knowledge by Pierro Sraffa in his 1926 Economic
Journal article. There is a symposium on this in then 1930 Economic
JOurnal article with Young. This is a major weakness in the whole
Neoclassical
edifice which is even acknowledged though not integrated into a theory by
Marshal himself and by recent Neoclassicals such as Mansfield in his text
"MIcroeconomics" (8th Edition , Norton) - see empirical estimates of
long-run total cost functions
(the flip side of production funtions) on p. 243-244. Most of them are
not "u" shaped. Robert Kuttner also adresses this issue while endorsing
a Schumpeterian view of long run dynamic efficiency in his recent
excellent book "Everything for Sale", Knof, 1996. I assume your refering
to long-run problems.
If I understand your question correctly, This is a long standing central
point of
contention between NC's and others PK's, Rads, Schumpeterians, etc.
Best,
Ron
**********************************************
Ron Baiman
Dept. of Economics
Roosevelt University Fax: 312-341-3680
430 South Michigan Ave
Chicago, Illinois 60605 Voice: 312-341-3694
**********************************************
On Tue, 2 Sep 1997, Rudy Fichtenbaum wrote:
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> I a gearing up to teach our introductory course in economics (We are on
> a quarter system). All principles book always portray the PPC as being
> concave and use it to talk about the law of diminishing returns. Isn't
> this incorrect from a technical perspective because diminshing returns
> requires that one factor be held constant while varying another factor?
> In transfering resources from guns to butter (the classic example) isn't
> one transfering both labor and capital? If this is the case then how
> can the law of diminishing returns apply?
>
> Next most texts rationalize the concave shape and the law of diminishing
> returns by stating that as resources that are best suited for one type
> of production are transfered to another type of production they are not
> as efficient. This results in increasing costs i.e., a concave
> production funtion. How can this be squared with the assumption that
> labor and capital are homogenious? If labor and capital are homogenious
> then they should be equally adept at producing guns or butter.
>
> The only way I know of to get a concave PPC is to have two production
> functions where at least one has increasing returns to scale. This is
> of course inconsistent with perfect competition.
>
> Am I right about this stuff or did I miss something?
>
> Rudy
> --
> Rudy Fichtenbaum Phone:
> 937-775-3085
> Department of Economics FAX: 937-775-3545
> Wright State University email:
> [EMAIL PROTECTED]
> Dayton, OH 45435
>
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