Beyond homogeneous production functions

Gluschenko, Konstantin (2025): Beyond homogeneous production functions.

Abstract

Standard production functions, being homogeneous, have unchanging returns to scale. Therefore, it remains unclear to students where the U-shape average-cost curves come from. This article considers non-homogeneous production functions that have variable returns to scale and can produce such curves, providing a specific example. The article also discusses the link between economies/diseconomies of scale and market structures, showing that economies of scale are incompatible with perfect competition. They are peculiar to monopolies and oligopolies, whereas in a perfectly competitive market there are no economies of scale, diseconomies of scale being a quite normal phenomenon.

• Item Type: MPRA Paper
• Language: English
• Keywords: returns to scale economies/diseconomies of scale non-homogeneous production function firm’s expansion path market structure
• Subjects: D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General

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