Increasing Cost Industry

3 Key excerpts on "Increasing Cost Industry"

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  eBook - ePub

  Lionel Robbins on the Principles of Economic Analysis

  The 1930s Lectures

  • Lionel Robbins, Susan Howson(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  So much for the apparent conflict between equilibrium theory and the supply curve analysis. Now, having recognized the nature of supply curve analysis, let us go on to examine in greater detail the possibilities of the curve itself.

  1. Let us take, first of all, the case of increasing costs.
     1. (a) Suppose to begin with that the factors of production can be hired at constant prices. Are IC conceivable?

  Here you should recollect the Pigovian argument I have already explained. If demand increases the supplies of the factors will be increased proportionately. There is no reason at first sight to suppose that costs will increase. That expansion will take the form of an increase in the number of firms. Any firm attempting to increase will meet with increasing costs because by hypothesis it is already at its optimal size. But new firms can come in and work at the least cost combination.

  The argument is convincing granted the assumptions. But there is one possibility which would allow IC to appear: the possibility of (external) diseconomies.

  Suppose the increase in the size of the industry involved – let us say congestion at loading stations used by the firms concerned – the setting up of frictions outside the productive units – then costs per unit might rise although internally nothing had happened to bring about the increase.

  How practically important this is I don’t know. But it is clearly a theoretical possibility. Otherwise when factor prices are constant, constant costs must prevail.

  1. (b) But if factor prices are free to vary, then clearly increasing costs are conceivable.

  If when an industry increases in size, the consequent increase in demand for some of the factors it uses drives up their price, then clearly costs per unit will rise. This was the case contemplated in the old textbooks when changes in the demand for “food” were supposed.

  There is no ground for theoretical dispute here. The only question is how often does this sort of thing occur in practice in circumstances suitable to be conceived in this way. Sraffa urges that so far as individual commodities are concerned, e.g. wheat

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  The Ethics of Competition

  • Peter F. Drucker, Frank Knight(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Looking at the supply curve from this new point of view it is evident that decreasing costs would mean that at higher prices less of the commodity would be produced than at lower prices. This certainly seems paradoxical, and suggests that there is something wrong with the notion of costs decreasing as supply increases. The further course of the argument will show that decreasing cost as a long-run tendency is indeed impossible under a natural competitive adjustment of industry. Under the conditions assumed, an increase in the production of any commodity means a transfer of productive resources into the industry and a decrease in the production of some other commodity. But, other things being equal, this decrease in the production of other goods will raise their prices and increase the strength of the competing attraction which they exert on productive resources against the industry in question in which output is being increased. In simpler terms, an increase in the output of any industry involves increased demand for the productive goods used in it, which increased demand raises their prices, that is, raises the costs of production of the commodity turned out.

  The implications of perfect competitive adjustment may now be briefly summarized and decreasing costs shown to be incompatible with the long-run tendencies of productive adjustments. In the first place a perfect market for productive services is implied, that is, uniform prices over the whole field. The costs cannot be different to different producers or for different parts of the supply of any one producer, on this account. In the long run the same productive goods will cost the same prices and all differences of every sort in productive situation will be evaluated at their true worth under the influence of competition and be converted into costs which function in the same way as all other costs in the producer’s calculations. Most of the apparent differences in production costs are undoubtedly due to imperfect evaluation of cost goods, and the tendency

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  Perfect Competition and the Transformation of Economics

  • Frank Machovec(Author)
  • 1995(Publication Date)
  • Routledge

    (Publisher)

  With the growth and localization of industry in a particular area, all firms eventually benefit from the development of a steady supply of skilled labor and a well-informed labor market. Thus, as new firms arrive in the area and draw in still more skilled labor, all the existing firms find that the cost of labor turnover and of labor training declines. The trade journal…, on the other hand, exemplifies external economies arising from improved [knowledge via] communication about market conditions. When the industry reaches a certain size, it becomes feasible to publish information and to make it cheaply available to all. Once again, the existing firms reap the benefits of cheaper information in the form of lower average costs of production. A third possible example…is that of the vertical disintegration that comes with a widened market. Since ‘the division of labor is limited by the extent of the market’, the growth of industry brings into being a host of specialized auxiliary industries to service the needs of the parent industry and the effect is to lower costs as a function of the output of the entire industry.

  (Blaug 1983:401–3 )

  The third case cited by Blaug was fully developed by Stigler in a 1951 article. The question answered by Stigler was the same one raised by Cournot and then Marshall. A former member of the Federal Trade Commission stated the issue succinctly in 1948: ‘The traditional problem of [the] size-efficiency question is concerned with the compatibility of competition with increasing size…. Briefly, the problem was this: What was there to prevent a given firm…from steadily increasing its size…until it had achieved a monopolistic position?’ (Blair: 122). Stigler settled this issue once and for all by explaining that each firm faces a multi-step production process, and at least one of these steps is usually characterized by increasing or constant returns to scale; nevertheless, the remaining steps are subject to decreasing returns to scale, so the net effect is that the gains from internal economies are finite and rather quickly exploited. Therefore, at any given instant in time, the firm sees itself facing a rising long-run marginal cost curve. However, as the market widens and each firms’s output expands, new specialists will emerge—who will seize the decreasing cost steps and build them into fledgling firms which will service the many existing firms of the industry from which they sprang. The contracting-out of these steps by the original firms enables the new specialists to exploit the original economies-of-scale steps and thereby reduce the unit costs of their clients. Moreover, this process describes the essence of change in every human endeavour:

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