Steel Production and Resource Allocation: An Empirical Study

THE U.S. steel industry has some interesting characteristics which have made itself a favored object of inquiry in many recent economic studies. The market structure of the industry, its pricing practices, the high degree of vertical integration in the production process, the long run existence of apparent excess capacities, the intrinsic nature of economies of scale in its production operations, etc., are but few of the many examples. Among them, the most interesting ones are perhaps those related to production: the choice of production techniques and the economies of scale, the effects of technological changes on input requirements and, consequently, on resource allocation. The purpose of this paper is to construct a production model of steelmaking which is capable of reflecting changes in production techniques and input requirements, and to use this model to study the impact of technological and environmental changes on the industrial performance. The first part of the paper gives a brief description of an activity analysis model of steelmaking. In the second part, the model is used to obtain a short run, industry wide production schedule. Given the exogenously determined resource supplies and variable production costs for each year, the annual least-cost allocation of resources and the least-cost level of intermediate good production are determined. The output levels and the amounts of inputs used in the optimal schedule are then compared with actual statistics for each year. In Part 3 the model is used in some simulative runs in which changes in the production environment are exogenously determined and fed in the system. Optimizing principles are applied and the simulative runs are made on the assumption that the industry as a whole behaves as if all of its component firms entertain a common objective.