Production, Investment and Idle Capacity

A MODEL OF THE FIRM IS FORMULATED IN WHICH THE PRODUCTION AND INVESTMENT DECISIONS OF THE FIRM ARE SUBSTANTIALLY DIFFERENT. IT WAS CONCLUDED THAT - 1. THE NEOCLASSICAL MYOPIC DEMAND EQUATIONS ARE VALID ONLY UNDER CERTAIN CONDITIONS. THERE IS NO REASON TO EXPECT THE OBSERVED LEVELS OF THE CAPITAL STOCK TO CONVERGE TO A LEVEL SPECIFIED BY THE MYOPIC DEMAND EQUATIONS WHEN THAT TARGET LEVEL IS FALLING AT A FASTER RATE THAN THE RATE OF ATTRITION. 2. THE OPTIMAL USE OF THE STOCK OF CAPITAL IS DETERMINED BY OPERATING COSTS RATHER THAN INVESTMENT COSTS ALONE. 3. THE NEOCLASSICAL THEORY OF PRODUCTION CAN ONLY BE VIEWED AS A DESCRIPTION OF REVERSIBLE INVESTMENT DECISION-MAKING. THERE IS NO SHORT-RUN PRODUCTION DECISION IN A REVERSIBLE INVESTMENT CONTEXT. 4. AN INDIVIDUAL FIRM'S ACTUAL DECISION ABOUT EXPANSION WOULD BE AFFECTED BY THE EXPECTATION OF INFLATED FUTURE CAPITAL COSTS. GRAPHS.