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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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