ABSTRACT

Using real world data, this chapter considers the relationship between the acquisition cost of an item of equipment (of any particular type) and the capacity of that item of equipment as the capacity varies from item to item. This relationship helps to explain the relationship between the acquisition cost of any plant and the capacity of the plant to produce annual output, because a plant is (from this point of view) merely an assemblage of items of equipment of different types, so what holds for equipment separately must hold for equipment collectively. The analysis is undertaken through what I call the power rule, so this chapter’s first task is fully to explain the power rule, which is the main reason for increasing returns to scale in relation to the use of fixed capital. In this chapter any unqualified reference to increasing returns to scale must be taken as a reference to increasing returns to scale with respect to the input of fixed capital.