ABSTRACT
This chapter analyses the incorporate increasing returns rigorously within the context of an admittedly simple model. The analysis of increasing returns has to be different from that of constant returns whether the production-possibilities frontier is convex or concave to the origin. When the production-possibilities frontier maintains the concave-to-the-origin shape, the formal analysis of increasing returns to scale does not differ at all from the analysis of constant returns to scale. It is usually said that, under conditions of increasing returns, competitive equilibrium exists if the indifference curves are "more convex" than the production-possibilities frontier. Major difference between constant and increasing returns to scale is the existence of multiple offers in the latter but not in the former case, with the resulting instability of the offer implying incomplete specialization. It is apparent that a country gains most when it specializes in the production of that commodity whose production function is characterized by increasing returns to scale.
