A Non-Parametric Approach to Measuring Short-Run Expansion Path
Journal of Quantitative Economics, Vol. 6, No. 1&2, Pages: 137-150, 2008
Posted: 18 Nov 2012
Date Written: 2008
Abstract
In the traditional theory of firm the concept of short-run production function was argued to be mere technical datum, showing all possible outputs that can result if various factor service combinations are used. This view holds only when the services of fixed factor, capital are assumed to be indivisible in use. However, reflection upon the physical nature of manufacturing production process suggests that services of fixed factor are divisible in use, in which case the short-run production function is a straight line up to some capacity output, and the points describing this function reflect some form of output-maximizing or cost-minimizing behavior by the entrepreneur. Therefore, when factor services are argued to be divisible in use in the short run, the traditional law of variable proportion does not hold, and there is thus a need to determine output expansion path of the firm. We therefore proposed a methodology in nonparametric framework to determine short-run output expansion path of the firm. We illustrate the application of this methodology with an example by taking a hypothetical data set involving two inputs and one output.
Keywords: returns to scale, production function, Indivisibility, data envelopment analysis
JEL Classification: D24, C61
Suggested Citation: Suggested Citation