Increasing returns to scale from variable capacity utilization |
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Authors: | Susheng Wang Lijing Zhu |
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Institution: | Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong. Email:;Office of the Vice-President for Academic Affairs, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong |
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Abstract: | We propose a unique model in which the firm varies capacity utilization by a variable number of shifts when facing demand fluctuations. In the long run, the firm optimally chooses a capacity level based on expected demand conditions. In the short run, when facing excess demand, the firm can increase variable inputs and the number of shifts to intensify the use of existing capacity. By endogenizing cost, demand and variability of capacity utilization, we show that variable capacity utilization can lead to increasing returns to scale. Hence, we predict increasing returns to scale when an economy expands in a business cycle. |
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Keywords: | variable capacity utilization increasing returns to scale business cycles |
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