Modeling Reasons for Firms’ Growth

Static neoclassical framework cannot be applied to model time dependent processes or increasing returns to scale in production. The dynamization of the neoclassical theory of a firm by dynamic optimization, on the other hand, assumes inconsistent profit functions with the former. As a solution to these problems, we present a dynamic theory of a firm consistent with the static neoclassical theory. Possible reasons for a firm’s growth are an increase in demand of the firm’s products, a decrease in costs or increasing returns to scale in production. We model the reasons causing these elements in firms’ production processes and present block diagrams of the models to reveal their control theoretic nature. (JEL B41, D21, D24)