Price Behavior with Vintage Capital
P. N. MATHUR
An economy experiencing continuous technical advance will necessarily be embodying part of its improving know-how in new capital equipment. Equipment of different vintages will work with different efficiencies and may require different amounts of inputs, labor, and working stocks to produce a unit of output. At a particular time, we may expect fixed capital equipment of several vintages to be used for producing the same commodity. Investment is made in equipment of the latest technique, but the older equipment may also continue production, even if it is likely to earn lower returns than new equipment. The old equipment will continue to be used, however, until enough capital of the newer vintages is accumulated to satisfy total demand for the commodity being produced. In a competitive industry with free entry, innovators with new, more efficient techniques can start production units; if demand does not increase pari passu, they will be able to lower the price of the commodity, which in turn will displace a requisite number of the most inefficient production units from the market. In a monopoly, however, the producer may deliberately delay the introduction of the new process, thus giving older capital equipment more time to survive economically than would otherwise have been possible.
Thus in a state of technological change we expect to witness a spectrum of technologies of different vintages existing and working simultaneously. We can define the technology associated with a vintage of capacity for the production of the jth commodity as follows:
|A(kj), S(kj)||Input and working stock vectors per unit of capacity|
b(kj) = pj - wl(kj) - PA(kj) - rPS(kj)
be the balance left after the prime costs per unit of output are met. We may call this