Eugene Coyle wrote: > CEOs don't believe in the U-shaped cost > curve -- they report that cost curves flat to the horizon are typical.
Average variable cost curves are not flat up to the horizon. Rather, it's until full capacity, so that they form reverse-L shapes (as do MC curves). This happens, as Kalecki pointed out, because at the same time that variable inputs (e.g., employment of labor) changes, so does the degree of usage of fixed inputs (capital goods), canceling out the standard diminishing marginal returns story. Of course, at some point the fixed inputs are used as much as they're designed for, so bottlenecks hit and average and marginal costs soar. (This can be shown with very simple math, even under such restrictive assumptions as the Cobb-Douglas production function.) An important reason why this phenomenon is ignored by the orthodoxy is that they implicitly or explicitly assume that capital equipment is fully utilized at all times. This is true even in macroeconomics, where labor is unemployment but capital equipment is not. This reflects the utopian assumptions that economists learn and the standard method of micro, in which only one variable is varied at a time. > Without the U-shape it is all straw, as Aquinas said on his death bed, > about something else. With less than full capacity, marginal cost pricing doesn't work unless firms have market power: setting prices equal to MC sets them equal to average variable costs, which doesn't pay for those darned fixed costs. > You can use Larry Summers and Brad DeLong on your topic.... >> A world in which the information-technology sector is salient is one in >> which more of the goods that are produced will have the character of >> pharmaceuticals or books or records, in that they involve very large fixed >> costs and much smaller marginal costs. >> An industry with high fixed costs and near-zero variable costs has another >> important characteristic: it tends to monopoly. >> … competition in already established markets with high fixed and low >> variable costs is nearly impossible to sustain. << Serious students of orthodox microeconomics (or of the work of Michael Perelman) shouldn't be surprised. The big issue is how prevalent these conditions are in the real world. > Of course the high fixed costs (sunk or overhead cost) are quite pervasive, > well beyond the two industries DeLong and Summers mention. It's a mistake to combine sunk costs and overhead costs. The former were paid in the past (as with a fixed investment done then) while the latter refer to costs that must be paid now (maintenance of the existing fixed equipment, etc.) independent of the level of production. > John Maurice Clark's book addressing overhead costs showed that: >>Thus the world of economic thought was made aware of a fact, which is older >>than railroads, older than economic science and, far from being a peculiarity >>of one business or of a group of highly capitalistic [i.e., >>capital-intensive, not greedy] businesses, is universal. … >> It became evident that economic law did not insure prices that would yield >> "normal" returns on invested capital, because the capital could not get out >> if it wanted to, and so had to take whatever it could get. >> …"Cut-throat competition" was seen to be a natural thing, and it was seen to >> be equally natural that business should adopt protective measures, whether >> combinations, pools, gentlemen's agreements, or a mere sentiment against >> "spoiling the market.<< Again, it's an empirical question about how important this phenomenon (highly capital-intensive enterprises) is. -- Jim Devine / "laugh if you want to / really is kinda funny / cause the world is a car / and you're the crash test dummy" -- Devil Makes Three. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
