Sustainability and Circular Economy Foundations

Introduction

Reverse logistics and green supply chains are often introduced as operational responses to waste, emissions, and resource scarcity. Their deeper significance, however, is strategic and systemic. Every supply chain depends on natural resources, energy, ecosystems, labour, communities, institutions, and markets. Decisions about product design, sourcing, manufacturing, distribution, use, collection, recovery, and disposal therefore create consequences beyond the focal firm.

Sustainability provides the broad normative objective: meeting present needs without undermining the ability of future generations to meet their needs. Circular economy thinking provides a system design orientation: retain the value of products, components, and materials for as long as possible while reducing dependence on virgin resources and avoiding waste. Reverse logistics supplies an important operational mechanism through which products and materials move from users back toward recovery, reuse, remanufacturing, recycling, or safe disposal.

For logistics managers, the central challenge is not simply to transport returned goods. It is to redesign flows and decisions so that economic value, environmental integrity, and social legitimacy are considered together. This chapter develops the principal foundations required for that task: the waste hierarchy, circular economy principles, the triple bottom line, industrial ecology, stakeholder theory, institutional theory, and the natural-resource-based view of the firm.

Learning Objectives

By the end of this chapter, the reader should be able to:

1. Explain the relationship between sustainability, green supply chains, reverse logistics, and circular economy strategies.
2. Apply the waste hierarchy to operational and supply-chain decisions.
3. Distinguish biological and technical cycles and evaluate circular business models.
4. Use the triple bottom line to assess competing performance outcomes.
5. Interpret industrial ecology as a systems approach to resource and waste flows.
6. Apply stakeholder theory, institutional theory, and the natural-resource-based view to managerial analysis.
7. Critically evaluate trade-offs, rebound effects, governance risks, and measurement challenges.

1. From Linear Supply Chains to Circular Systems

The conventional industrial model is often represented as a linear sequence: extract, produce, distribute, use, and dispose. This model treats materials as inputs and waste as an externality. It can generate efficiency and affordability, but it is vulnerable to resource price volatility, supply disruption, pollution, landfill constraints, and regulatory change.

A green supply chain integrates environmental considerations into purchasing, product design, production, transportation, warehousing, distribution, use, and end-of-life management. Reverse logistics is the process of planning, implementing, and controlling the efficient flow of goods, packaging, and information from the point of consumption toward a point of recovery or appropriate disposal. It includes returns management, repair, refurbishment, remanufacturing, recycling, reusable packaging, and product take-back.

The circular economy is broader than reverse logistics. It includes upstream design and business-model choices that reduce the need for return flows in the first place. Examples include durable products, modular components, repairability, product-service systems, sharing models, recycled inputs, and industrial symbiosis. Reverse logistics is therefore a necessary but not sufficient condition for circularity.

Circularity should not be confused with the claim that all materials can circulate indefinitely. Each cycle involves energy, transport, processing losses, quality degradation, and economic costs. A rigorous circular strategy asks which loop preserves the greatest value with the lowest total environmental and social burden.

2. The Waste Hierarchy

The waste hierarchy ranks management options according to their preferred environmental order. Although legal formulations vary by jurisdiction, the usual sequence is:

1. Prevention or reduction
2. Reuse
3. Preparation for reuse, repair, and refurbishment
4. Recycling
5. Energy recovery
6. Disposal

Prevention is superior to recycling because it avoids the material, energy, and emissions associated with producing an unnecessary item. Reuse normally retains more product value than material recycling because the product remains substantially intact. Recycling is preferable to energy recovery when it preserves material quality at acceptable environmental cost. Disposal is the least preferred option, although safe disposal remains necessary for contaminated, hazardous, or technically unrecoverable residues.

Figure: The waste hierarchy, with prevention at the highest level of preference and disposal at the lowest.

The hierarchy is a decision principle, not an automatic ranking independent of context. For example, transporting a reusable container over a very long distance for cleaning may create more impact than locally recycling a lightweight container. Managers should therefore combine the hierarchy with life-cycle assessment, safety requirements, product quality, infrastructure availability, and social conditions.

A useful operational question is: “Can the need be avoided?” If not, “Can the product be used again?” If not, “Can its components be repaired or remanufactured?” If not, “Can materials be recovered?” Only after these options have been assessed should energy recovery or disposal be selected.

3. Circular Economy Principles and Models

Circular economy frameworks differ in terminology, but several principles are widely shared:

• Design out waste and pollution.
• Keep products and materials in use at their highest practical value.
• Regenerate natural systems.
• Use renewable energy and reduce dependence on finite resources.
• Build resilience through diversity, modularity, and local capability.
• Use systems thinking rather than optimizing one isolated activity.

3.1 Biological and technical cycles

Biological nutrients, such as food and untreated organic fibres, can return safely to ecological systems through composting or other regenerative processes. Technical nutrients, such as metals, polymers, and engineered components, should circulate through maintenance, reuse, repair, refurbishment, remanufacturing, and recycling. The distinction is important because technical materials should not be released indiscriminately into biological systems, while biological materials may lose value if treated solely as industrial waste.

3.2 The value-retention hierarchy

Circular strategies generally seek the highest-value loop available:

• Maintain: extend the life of an item through care and servicing.
• Reuse: transfer the item to another user without major transformation.
• Repair: restore functionality by replacing or fixing defective parts.
• Refurbish: restore a used product to a specified condition.
• Remanufacture: disassemble, inspect, replace, and reassemble components to meet defined performance standards.
• Recycle: recover materials, often with some loss of quality or embodied value.
• Recover energy or dispose: manage residuals when higher loops are infeasible.

The distinction between refurbishment and remanufacturing is especially relevant in industrial supply chains. Remanufacturing generally involves a controlled industrial process, engineering specifications, testing, and a warranty or equivalent assurance. Refurbishment may involve less extensive restoration and more variable performance.

3.3 Circular business models

Circular supply chains may be organized around:

1. Product life extension, such as repair contracts and durable design.
2. Product as a service, where the customer purchases access or performance rather than ownership.
3. Sharing platforms that increase asset utilization.
4. Resource recovery through collection, sorting, recycling, and secondary-material markets.
5. Industrial symbiosis, in which one organization’s by-product becomes another organization’s input.
6. Circular supplies, using renewable, recycled, or responsibly sourced inputs.

These models redistribute responsibilities. A product-as-a-service model may give the manufacturer stronger incentives to design durable and repairable equipment, but it also requires reverse flows, asset tracking, maintenance capability, customer trust, and appropriate contracts.

4. The Triple Bottom Line

The triple bottom line evaluates organizational performance through three dimensions: economic prosperity, environmental quality, and social equity. It is commonly summarized as people, planet, and profit. The framework is valuable because a project that reduces waste but creates unsafe work, or one that improves labour conditions while becoming economically unsustainable, cannot be regarded as fully sustainable.

The framework does not imply that the three dimensions are always equal or easily aggregated. A manager must make explicit how trade-offs are evaluated. For example, replacing a single-use package with a reusable package may increase reverse transport and cleaning costs while reducing waste. The correct decision depends on the number of reuse cycles, transport distances, cleaning energy, loss rate, and material composition.

For a simple comparative assessment, a decision team may define normalized scores for economic, environmental, and social performance. A weighted index can be written as:

Here, E, N, and S_o are normalized scores for economic, environmental, and social performance; w_E, w_N, and w_S are non-negative decision weights; and w_E + w_N + w_S = 1. The index is applicable only when the scores have been defined on comparable scales and the decision-makers accept the weights. It is not an objective measure of sustainability; it is a transparent decision aid.

Worked application: reusable packaging

Suppose a firm compares two packaging systems using scores from 0 to 100:

If the weights are 0.30, 0.45, and 0.25 respectively, the reusable score is:

The single-use score is:

Under these stated preferences, reusable packaging is preferred. The conclusion would change if the weights or underlying life-cycle data changed. The example illustrates the importance of transparent assumptions rather than presenting a weighted score as universally valid.

5. Industrial Ecology and Life-Cycle Thinking

Industrial ecology studies industrial systems as interconnected systems of material and energy flows, analogous in some respects to ecological systems. It asks how production and consumption can operate within ecological limits. The unit of analysis may be a product, facility, industrial region, supply network, or economy.

Three ideas are particularly important:

• Material flow analysis: traces quantities of materials entering, moving through, accumulating in, and leaving a system.
• Industrial symbiosis: coordinates geographically or organizationally separate firms so that waste heat, water, by-products, or residual materials are exchanged.
• Life-cycle thinking: considers impacts from raw-material extraction through production, distribution, use, recovery, and final treatment.

Life-cycle assessment is commonly structured through goal and scope definition, inventory analysis, impact assessment, and interpretation. A supply-chain decision should specify the functional unit, system boundary, allocation rules, data quality, and impact categories. For example, comparing two delivery systems requires a functional unit such as “delivery of 1,000 orders to customers,” not merely “one vehicle trip.”

A simplified material balance is:

All terms must refer to the same material and time period, and units must be consistent, such as tonnes per year. The balance is a conservation relationship; it does not by itself indicate whether the system is environmentally desirable. A system may balance perfectly while generating toxic emissions or unsafe work.

Industrial ecology also highlights rebound effects. Efficiency improvements can reduce the resource intensity per unit while lowering cost and increasing total demand. If total consumption rises enough, the absolute environmental benefit may be reduced or eliminated. Consequently, managers should monitor both intensity indicators, such as kilograms of material per unit, and absolute indicators, such as total tonnes used.

6. Stakeholder Theory

Stakeholder theory holds that organizations have responsibilities to groups that affect, or are affected by, organizational activity. In reverse and green supply chains, stakeholders include customers, employees, suppliers, logistics providers, regulators, investors, local communities, waste workers, non-governmental organizations, and future generations.

Stakeholder analysis can classify groups according to power, legitimacy, urgency, dependence, and vulnerability. A large retailer may possess purchasing power, while informal waste workers may have low formal power but high vulnerability and strong practical knowledge. A narrow focus on powerful stakeholders can therefore produce ethically deficient decisions.

A practical stakeholder process includes:

1. Identify affected and influential groups.
2. Map benefits, costs, risks, and dependencies.
3. Consult stakeholders before irreversible decisions.
4. Establish grievance and remedy mechanisms.
5. Define responsibilities and measurable commitments.
6. Report performance and revise decisions when evidence changes.

Stakeholder theory changes the meaning of efficiency. A collection system that minimizes the firm’s cost by transferring unsafe sorting work to poorly protected contractors may be financially efficient for the focal firm but socially and ethically unacceptable. Responsible procurement should therefore examine labour conditions, freedom of association, wages, working time, health and safety, discrimination, forced labour, and child labour throughout the chain.

7. Institutional Theory

Institutional theory explains how organizations are influenced by formal rules, professional norms, cultural expectations, and pressures from other organizations. Three mechanisms are commonly distinguished:

• Coercive pressures: laws, regulations, permits, contractual requirements, and dominant-customer demands.
• Normative pressures: professional standards, education, certifications, and expectations of appropriate conduct.
• Mimetic pressures: imitation of competitors or leading organizations under uncertainty.

These pressures help explain why firms adopt environmental management systems, sustainability reporting, extended producer responsibility, supplier codes, or recycled-content targets. Adoption may be substantive, producing real operational change, or symbolic, producing documents and claims with limited underlying performance.

Institutional analysis is especially useful when comparing countries or industries. A take-back system may be commercially attractive in one jurisdiction because producer-responsibility rules, collection infrastructure, and enforcement are strong, but unviable elsewhere. Managers should distinguish regulatory compliance from sustainability leadership. Compliance is a minimum condition; it does not guarantee that impacts are acceptable.

A major governance risk is greenwashing: misleading stakeholders about environmental benefits through vague claims, selective data, inappropriate comparisons, or unverified labels. Credible communication requires defined boundaries, evidence, traceability, materiality, and independent assurance where appropriate.

8. The Natural-Resource-Based View of the Firm

The natural-resource-based view extends the resource-based view by arguing that capabilities related to environmental protection can create competitive advantage. Important strategic capabilities include:

1. Pollution prevention: reducing waste and emissions at source through process control, quality improvement, and efficient resource use.
2. Product stewardship: managing environmental and social impacts across the product life cycle, including design, sourcing, use, and end-of-life.
3. Sustainable development: building capabilities that support long-term ecological and social resilience while creating economic value.

These capabilities can be valuable because they reduce costs, protect firms from regulatory and supply risks, improve reputation, stimulate innovation, and strengthen customer relationships. They are not automatically rare or difficult to imitate; competitive advantage depends on organizational integration, learning, data, supplier relationships, and credible implementation.

The theory also cautions against treating nature merely as a source of inputs. A firm that has excellent reverse logistics but depends on destructive extraction may improve one operational loop while worsening the broader system. Strategic analysis should therefore consider resource dependence, ecological thresholds, substitution limits, and long-term resilience.

9. Integrating the Theories into Supply-Chain Decisions

The theories answer different questions and should not be treated as interchangeable:

A robust decision process combines them. First, define the problem and system boundary. Second, apply the waste hierarchy to identify preferred interventions. Third, map material, energy, information, and financial flows. Fourth, assess economic, environmental, and social outcomes. Fifth, identify stakeholders and institutional requirements. Sixth, determine whether the organization has the capabilities to implement the option. Finally, monitor actual outcomes and revise the design.

10. Illustrative Case: Circular Electronics Take-Back

Background. Orion Devices, a fictional mid-sized manufacturer of business laptops, sells through distributors in three countries. Its products contain valuable metals and components, but returned units are processed inconsistently. Some are resold, some are dismantled by contractors, and some enter informal waste channels.

Problem. The company faces rising material prices, customer demands for secure data destruction, proposed extended producer-responsibility rules, and criticism concerning unsafe downstream recycling. Management initially proposes a recycling contract based on the lowest processing price.

Analysis. The waste hierarchy indicates that prevention of premature replacement and product life extension should be considered before material recycling. Stakeholder analysis identifies customers, repair technicians, employees, contractors, regulators, local communities, and informal waste workers as relevant groups. Institutional analysis reveals coercive pressure from data-protection and waste rules, normative pressure from responsible-sourcing standards, and mimetic pressure from competitors offering take-back programs. The natural-resource-based view suggests that design-for-repair, secure refurbishment, and recovery capability may become strategic resources.

A life-cycle-oriented assessment identifies several possible loops:

• Remote diagnostics and software support to prevent unnecessary returns.
• Modular batteries and replaceable storage devices to enable repair.
• Certified data erasure before resale or refurbishment.
• Component harvesting for repair of newer units.
• Material recycling for damaged or obsolete units.
• Audited residual treatment for hazardous fractions.

Approach. Orion establishes a take-back program with regional consolidation centres, standardized grading, chain-of-custody records, and contracts requiring worker-protection controls. It redesigns two product families for easier disassembly, publishes repair information for authorized providers, and offers customers a certified data-destruction record. Returned units are prioritized for direct reuse, then repair, refurbishment, component harvesting, recycling, and disposal. Performance is reported using financial, environmental, and social indicators rather than recycling rate alone.

Outcome. The program increases handling complexity and requires initial investment. However, it reduces virgin-material purchases, creates a reliable source of service parts, improves customer retention, and reduces uncontrolled downstream disposal. The company also discovers that some returns were caused by packaging damage and software configuration errors; prevention activities therefore generate benefits larger than recycling alone.

Learning points. First, circularity begins with product and service design. Second, high collection rates do not prove high circular value. Third, secure information management is part of electronics reverse logistics. Fourth, contractor governance is an ethical and operational requirement. Fifth, a circular program should measure avoided replacement, product life extension, recovered value, worker safety, and residual risk.

11. Measurement, Technology, and Contemporary Developments

Useful indicators should reflect both flow and outcome. Examples include return rate, repair yield, first-pass recovery yield, average product life, recycled content, virgin-material intensity, landfill diversion, greenhouse-gas emissions, worker injury rate, and percentage of suppliers covered by verified audits. Metrics must be defined precisely. “Recycling rate,” for example, may refer to collected mass, processed mass, or material actually returned to productive use; these are not equivalent.

Digital technologies can support circular supply chains through product identifiers, Internet-of-Things condition monitoring, demand forecasting, route optimization, digital product information, blockchain-based chain-of-custody records, and artificial intelligence for grading returned products. Their benefits depend on data quality, interoperability, cybersecurity, privacy, explainability, and access. AI classifications can reproduce bias or misclassify repairable products as waste if training data are poor. Digital systems should therefore augment professional judgment and be subject to audit.

Contemporary policy developments include extended producer responsibility, right-to-repair measures, minimum recycled-content rules, eco-design requirements, carbon disclosure, due-diligence obligations, and restrictions on misleading environmental claims. Requirements vary across jurisdictions and change over time. Professionals must consult applicable law rather than relying on general principles alone.

Challenges and Limitations

Circular economy initiatives face several limitations:

• Economic viability: collection, sorting, cleaning, testing, and reverse transport can cost more than virgin production.
• Quality loss: recycling may produce lower-quality materials, while contamination reduces recovery value.
• Scale and coordination: circular systems require compatible designs, standards, infrastructure, and market demand.
• Information asymmetry: firms may not know product condition, material composition, or downstream treatment.
• Rebound effects: lower costs or improved efficiency may increase total consumption.
• Burden shifting: impacts may move from carbon emissions to water use, land use, toxicity, or labour risks.
• Uncertain attribution: it can be difficult to estimate how much new production is actually avoided by recovery.
• Social justice: collection and recycling burdens may be concentrated in poorer communities or informal workforces.
• Greenwashing: attractive circular language can conceal low recovery rates or short product lifetimes.

These limitations do not invalidate circular economy strategies. They require disciplined system boundaries, evidence-based claims, scenario analysis, stakeholder participation, and continuous improvement.

Best-Practice Decision Checklist

Before approving a green or circular supply-chain initiative, managers should ask:

1. Does the initiative prevent material use or merely manage waste after it is created?
2. Which value-retention loop is technically and economically feasible?
3. What are the full life-cycle impacts, including transport, cleaning, energy, and residuals?
4. Who bears the costs and risks, and who receives the benefits?
5. What laws, standards, contracts, and professional norms apply?
6. Are suppliers and downstream processors traceable and independently verifiable?
7. Are claims supported by defined data, functional units, and system boundaries?
8. Could efficiency produce a rebound effect or shift burdens elsewhere?
9. Does the firm possess the capabilities needed for implementation?
10. How will actual outcomes be monitored and corrected?

Chapter Summary

Sustainability in logistics requires more than reducing transport cost or diverting waste from landfill. The waste hierarchy prioritizes prevention, reuse, repair, refurbishment, recycling, recovery, and safe disposal in that order, subject to life-cycle and contextual assessment. Circular economy thinking seeks to retain product, component, and material value while regenerating natural systems and reducing dependence on virgin resources.

The triple bottom line frames performance through economic, environmental, and social outcomes. Industrial ecology adds systems analysis of material and energy flows, industrial symbiosis, and life-cycle impacts. Stakeholder theory highlights responsibility to affected groups, including vulnerable workers and communities. Institutional theory explains the influence of regulation, norms, and imitation while drawing attention to symbolic adoption and greenwashing. The natural-resource-based view links environmental capabilities to resilience and potential competitive advantage.

Together, these frameworks support better decisions about product design, sourcing, reverse logistics, recovery, supplier governance, and circular business models. Their application requires transparent boundaries, credible data, ethical governance, attention to trade-offs, and recognition that circularity is a means of improving system performance—not a substitute for critical evaluation.

Key Terms

Sustainability: Meeting present needs without compromising future generations’ ability to meet their needs.

Green supply chain: Supply-chain management that incorporates environmental considerations across the life cycle.

Reverse logistics: Planning and controlling flows from the point of consumption toward recovery or appropriate disposal.

Circular economy: An economic system designed to retain value and regenerate natural systems while minimizing waste.

Waste hierarchy: A ranked preference for prevention, reuse, recovery, and disposal options.

Reuse: Using a product again for the same or a similar purpose without major transformation.

Refurbishment: Restoring a used product to a specified functional condition.

Remanufacturing: Industrial disassembly, inspection, replacement, reassembly, and testing to restore a product or component.

Recycling: Processing waste into materials that can serve as inputs for new products.

Triple bottom line: Evaluation through economic, environmental, and social dimensions.

Industrial ecology: Study of industrial systems as interconnected flows of materials, energy, and information.

Industrial symbiosis: Exchange of by-products, energy, water, or services among organizations.

Life-cycle assessment: Systematic assessment of impacts from resource extraction through end-of-life.

Stakeholder theory: The view that organizations have responsibilities to affected and influential groups.

Institutional theory: Explanation of organizational behavior through regulatory, normative, and mimetic pressures.

Natural-resource-based view: Strategic perspective linking environmental capabilities with organizational advantage and resilience.

Extended producer responsibility: Policy approach assigning producers responsibility for products across or beyond their life cycle.

Greenwashing: Misleading communication that exaggerates or misrepresents environmental performance.

Rebound effect: Increase in total consumption that partially or fully offsets efficiency gains.

Review Questions

5 Short Answer Questions

1. Why is reverse logistics necessary but not sufficient for a circular economy?
2. List the main levels of the waste hierarchy in descending order of preference.
3. What are the three dimensions of the triple bottom line?
4. Distinguish refurbishment from remanufacturing.
5. Name the three institutional pressures described in institutional theory.

5 Long Answer Questions

1. Explain how the waste hierarchy should guide decisions about returned products, and discuss why contextual life-cycle assessment remains necessary.
2. Compare the circular economy and industrial ecology perspectives in relation to reverse logistics.
3. Discuss how stakeholder theory changes the evaluation of a low-cost recycling contract.
4. Explain the natural-resource-based view and its relevance to green supply-chain capabilities.
5. Evaluate the benefits and limitations of using a weighted triple-bottom-line score for managerial decisions.

3 Analytical / Application Questions

1. A retailer is choosing between single-use and reusable delivery packaging. Design an assessment using the waste hierarchy, life-cycle thinking, stakeholder theory, and triple-bottom-line criteria.
2. A manufacturer reports a 95% collection rate for returned electronics but cannot verify downstream processing. Analyze why the claim does not establish circularity and propose better indicators.
3. A company adopts a circular business model after a competitor receives positive publicity, but makes no product or process changes. Use institutional theory to analyze the situation and recommend governance measures.

Multiple Choice Questions with Answers

Question 1

Which option is highest in the waste hierarchy?

A. Disposal

B. Energy recovery

C. Recycling

D. Prevention

Correct Answer: D. Prevention

Question 2

Which activity best represents remanufacturing?

A. Selling an unopened product to another customer

B. Industrial disassembly, component replacement, testing, and reassembly

C. Burning residual waste to generate electricity

D. Separating mixed plastics into material fractions

Correct Answer: B. Industrial disassembly, component replacement, testing, and reassembly

Question 3

In the triple bottom line, worker safety is primarily a concern under which dimension?

A. Economic

B. Environmental

C. Social

D. Technical

Correct Answer: C. Social

Question 4

Industrial symbiosis occurs when firms:

A. Compete to purchase the same virgin material

B. Exchange by-products, energy, water, or services as useful inputs

C. Eliminate all material flows between facilities

D. Outsource every reverse-logistics activity

Correct Answer: B. Exchange by-products, energy, water, or services as useful inputs

Question 5

Which is an example of coercive institutional pressure?

A. A regulation requiring producer take-back

B. A professional association’s recommended practice

C. Imitating a competitor’s packaging design

D. An employee’s personal preference

Correct Answer: A. A regulation requiring producer take-back

Question 6

A product-as-a-service model can encourage circularity primarily because it may:

A. Remove the need for maintenance

B. Give providers incentives to extend product life and recover assets

C. Guarantee that all products are recycled

D. Eliminate customer involvement

Correct Answer: B. Give providers incentives to extend product life and recover assets

Question 7

Using the chapter’s weighted-score method, an option has economic, environmental, and social scores of 60, 80, and 70. With weights 0.30, 0.45, and 0.25, what is its score?

A. 68.5

B. 70.0

C. 71.5

D. 73.0

Correct Answer: C. 71.5

Question 8

Which statement best describes the natural-resource-based view?

A. Environmental capabilities can support resilience and competitive advantage

B. Natural resources have no strategic relevance after purchase

C. Only legal compliance creates competitive advantage

D. Reverse logistics is exclusively a disposal activity

Correct Answer: A. Environmental capabilities can support resilience and competitive advantage

Question 9

Why can a high recycling rate fail to demonstrate circularity?

A. Recycling is always prohibited

B. Collection or processing may not retain product value or avoid virgin production

C. Recycling never involves transport

D. Recycling is higher than prevention in the hierarchy

Correct Answer: B. Collection or processing may not retain product value or avoid virgin production

Question 10

Which issue is a potential rebound effect?

A. A product is repaired instead of discarded

B. Efficiency lowers unit cost and leads to enough additional demand to increase total resource use

C. A hazardous residue is safely isolated

D. A supplier improves worker protection

Correct Answer: B. Efficiency lowers unit cost and leads to enough additional demand to increase total resource use