Technical Possibilities, Usable Blue Prints and Physical Plant Capacity: A Simple Model of Endogenous Technical Change

This paper presents a simple model of technology development that leads to a reduction in production costs. With constant returns to scale, it assumes that q_t= kappa (t) f_t (k_t) where q_t and k_t are respectively output and capital both per unit of labour and kappa reflects the efficiency of the process. It treats kappa and k as endogenous while f_t is taken to be an exogenous function determined by the existing scientific and technological possibilities. kappa and k are chosen so as to minimise a cost function which incorporates the cost of changing from one technology to another, given wage and capital costs and demand conditions at each point of time. It is shown that the conventional first order conditions get modified to include the cost of changing technology. The comparative statics exercises are then carried out with reference to changes in factor prices and their implications are analysed.