Measurement and decomposition of flexibility of multi-output firms

Flexibility can be considered a crucial factor of competitive advantage, especially under conditions of dynamically changing environments. Based on the classical microeconomic definition, flexibility is characterised as a firm's ability to change output by sustaining its average costs. Using some recent concepts developed in production economics, this article proposes a primal flexibility measure for multi-product firms. When decomposed, this measure offers useful insights into possible sources of flexibility, especially by investigating the role of both scale and scope economies. This approach provides the theoretical basis for our investigation into the magnitude and sources of flexibility in the Polish agricultural sector.