| Abstract: | Three interactive factors affecting the efficiency of firms and the demand for inputs underlie the firm model presented in this paper. They are the chronic shortage of key materials and energy, the immobility of capital and labor, and the endogeny of wage rate determination to firms. These assumptions are relatively more general and realistic for the Chinese economy than assumptions made in other firm models that may be suitable for market or Eastern European economies. By this model it can be shown that resource allocation within Chinese firms generally is not efficient and that the basic demand law for labor and capital is invalidated by immobility of factors and endogeny of wages. Overexpansion or a demand for inputs exceeding the amount necessary for efficient production is very probable. |
