From a cost accounting perspective you've set off a very interesting thread,
Chris.
Let me add my two penn'orth that you Economists might end up guffawing at;
but let me do it anyway!
From my point of view your discussion has been largely abstract: although a
couple of you have highlighted example industries/sectors to help amplify
your points. Suppose you brought this down to a real example to help
illustrate your problem?
My work in designing and installing product cost systems in a variety of
industries took me to some of the issues that you raise. Let me just give a
couple of pointers.
Take a look at learning and experience curves: they exist in even the
weirdest places and are a perfect way of discussing economies and
diseconomies of scale. I am sure I have mentioned my own learning curve
experiments where I have examined both economies and diseconomies.
I challenge the majority of businesses in the universe to be able to give,
WITH CONFIDENCE a projected medium or long term cost schedule. Even the
biggest companies fall foul of reality: just look at Enron, for example, as
a catastrophic example of people thinking they knew it all: Enron executives
and business analysts alike.
Moreover, my own work shows that even with relatively complex organisations,
the assumptions and predications that real live businessmen make lead to,
surprise, surprise, linear cost functions. A chap called Johnston working at
Manchester University in and around 1960 suggested that linear estimations
for accountants are generally fine, anyway, since many cost functions tend
to linearity. Economists might be spinning as they read that. Never forget
the RELEVANT RANGE.
It might help if you plot the supply/demand schedule above the cost volume
schedule, using corresponding scales, and examine the relationships you're
examining.
There you are ... 2d!
Duncan Williamson
-----Original Message-----
From: For teachers and lecturers interested in curriculum issues
affecting the te [mailto:[log in to unmask]]On
Behalf Of Chris Rodda
Sent: 20 December 2001 06:20
To: [log in to unmask]
Subject: Re: Law of increasing costs v. Economies of scale
Interesting point Richard - which I agree with - but show me a perfectly
competitive industry!
My original point was related to texts which state supply curves slope
upwards because 1 ...2...3..I was particularly bothered about the increasing
cost arguments. There seems to be something contradictory about the law of
increasing costs and the idea of economies of scale. So I have been trying
to find original sources rather than A level texts. A level texts perhaps
get shortened and pass through many editions and lose some of the precision
and depth required of proofs -rather than explanations.
Marshall has the first comprehensive go at supply as far as I can see - but
he believed in downward sloping long run supply curves for decreasing cost
industries. Whilst others thought this not important. However, not
important and not existing are not the same thing.
I understand that we can get rid of the downward slope of mc curves by
insisting on equlibrium for all firms so that output occurs on the upward
slope and by summing the results end up with an industry curve.
But notice - IF we are in PC, and IF they are all in equlibrium.
Another problem to my mind is the oft read quotes about L shaped cost curves
in Oligopolies - (can someone point me to this research in its original.
form?)
Put side by side these arguments appear (to me) contradictory and need a
very clever dog to recover the duck from the weeds.
I might be a little pedantic here - but I was trying to write a passage on
supply and writing"supply curves slope upward" was beyond me. After teaching
logic I find myself wanting to be able to justify every statement.
Perhaps I would be better to write - 'in certain theoretical cases where
certain conditions are met - supply curves slope upwards, and are usually
but not always presented this way in textbooks.
My last point - although I haven't though hard about this yet is - why do
some texts say that as commodity prices fall the output rises to maintain
income - surely this contradicts upward sloping supply curves too.
Well I guess I can evade the whole thing by saying that in the theoretical
X, but in reality Y.
Presumably greater minds than mine have tackled this and I was looking for
someone to point me in the direction of academic research rather than
another A level text.
The lack of bibliographies in textbooks is a strange omission. We wouldn't
tolerate it in coursework.
I very much like Hick's and Edgeworth's combination of work to explain
demand curves which reconcile, I think, theory and reality (despite what
Paul Omerod might say - does anyone hate that book as much as me?).
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