Economics(Paper-4) - Shivaji University

Prof.R.Rodan has mentioned three kinds of indivisibilities, explained as under.
1. Indivisibility in Production Function
2. Indivisibility in Demand
3. Indivisibility in Supply of Savings.
1. Indivisibility in Production Function:
Indivisibility in production function refers to the indivisibilities of input, output and
production processes. These indivisibilities lead to increasing returns higher output,
income, employment and lowering capital – output ratio. Rodan regards social overhead
capital (power, transport, communication and housing, etc.) as important constituent
of indivisibilities and external economies. The reason is that expansion of social
overhead capital creates investment opportunities in various industries which help in
rising the level of investment. Sustained economic development requires creation and
expansion of social facilities, which requires large amount of investment called
“lumpiness of capital”. Lumpiness of capital creates external economies which are the
way of economic development.
2. Indivisibility of Demand:
For expansion of market demand indivisibility is more important. The small markets
limit the investment opportunities and obstruct the development process. The indivisibility
of demand requires simultaneous investment in various industries. Rodan cites the
example of shoe factory to explain the point. Assuming a closed economy, let us suppose
that hundred disguised unemployed workers (whose marginal productivity is zero) are
employed in a shoe factory.Their wages would constitute additional income. If newly
employed workers spend their entire income for the purchase of shoes they produce,
the shoe factory will find a market. Considering workers have diverse demands and do
not spend their entire additional income on shoes, and then shoe factory may face the
problem of less demand for shoes and small market for its product. The small size of
market would reduce the incentive to invest and the result would be the closure of the
factory.This way the investment in a single project would fail to widen the size of market.
Now suppose the thousand workers are employed in hundred industries and they
produce consumer goods and newly employed workers spend their wages for the
purchase of those goods. This would enlarge the extent of demand and the size of the
market. Thus the indivisibility of demand necessarily implies a high quantum of
investment in complementary industries for enlarging the size of market.
3. Indivisibility in the Supply of Savings:
We have discussed above that a large amount of investment is necessary for
starting complementary industries. In underdeveloped countries the level of savings is
low because of low level of national income. To generate savings it is imperative that a
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