Economics @ ITT

Time for a New Theory of the Firm

Posted in economics, microeconomics by ittecon on January 20, 2014

In first year economics when the supply curve was shown as upward sloping, the annoying undergraduate in me asked: why? When we get on to exactly why the supply curve is upward sloping, lo and behold, it is simply a representative firm’s marginal cost curve. Amazing!

But wait. If that’s true then firms operate at a point where there are diseconomies of scale. Yet didn’t most goods come down in price as output increased? What happened to the whole idea of economies of scale?

via Fresh economic thinking: Time for a new theory of the firm.

One Response

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  1. Brian Albrecht said, on January 20, 2014 at 1:05 pm

    That argument seems to be taking correlation as causation. Yes, increased output occurs at the same time as price falls. It seems that these are generally caused by a third factor technology.

    However, supply curves assume technology is constant. In that world, which is the real world for most firms, increased expansion costs more. Otherwise, the firms would increase.

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