The intertemporal dimension of neoclassical production theory

The aim of this survey paper is to provide a guide to the literature on optimal dynamic factor demands to the non‐specialist reader interested in applied work. We start with the distinction between variable and quasi‐fixed factors of production and use these to characterize the firm's temporary equilibrium. We then review the optimal intertemporal behaviour of the firm, using the notion of adjustment costs as a means to solve the firm's optimization problem. This process gives rise to a system of interrelated dynamic factor demands in a flexible accelerator format. Theoretical difficulties and empirical limitations of this model are discussed. This fact leads us to review the theory of intertemporal duality. We next analyze the issue of expectations in this class of dynamic models. A section reviewing the empirical work on dynamic factor demands follows, after which we offer some concluding remarks.