How to derive a cost curve

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How to derive a cost curve
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Start with a production function
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Rotate it 90 degrees
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Reverse it
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Re-label the axes
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The Short-Run Supply Curve

• At any market price, the marginal cost curve
  shows the output level that maximizes profit.
  Thus, the marginal cost curve of a perfectly
  competitive profit-maximizing firm is the firms
  short-run supply curve.

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• increasing returns to scale, or economies of
  scale An increase in a firms scale of
  production leads to lower costs per unit produced.

• constant returns to scale An increase in a
  firms scale of production has no effect on costs
  per unit produced.

• decreasing returns to scale, or diseconomies of
  scale An increase in a firms scale of
  production leads to higher costs per unit
  produced.

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Returns to scale vs. declining or rising AC It
is easy to confuse these ideas, but theyre
really quite different. When AC changes, it is
because (1) fixed costs are being spread over
larger levels of output, and/or (2) MPL is
changing because of crowding or better usage of
fixed factors of production. When scale
changes, otherwise fixed factors of production
have been allowed to vary upward or downward.
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• The long run average cost curve of a firm
  exhibiting economies of scale is downward-sloping.

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• The LRAC curve of a firm that eventually exhibits
  diseconomies of scale becomes upward-sloping.

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• In the long run, equilibrium price (P) is equal
  to long-run average cost, short-run marginal
  cost, and short-run average cost. Profits are
  driven to zero.

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Sources of Economies of Scale

• Larger size may yield greater possibilities for
  specialization and division of labor.
• Expenses of more advanced technology and
  cost-lowering equipment can be spread over larger
  sales.
• Servicing wider markets tends to lower risks
  associated with seasonality and the business
  cycle.
• Larger scale can mean cheaper and more stable
  supply of intermediate goods and services.

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• Firms Expand in the Long Run When Increasing
  Returns to Scale Are Available

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Note high average cost of lower level of output
in larger Scale 2 plant...

• Firms Expand in the Long Run When Increasing
  Returns to Scale Are Available

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Breaking the Chain The antitrust case against
Wal-Mart Posted at http//www.harpers.org/Breaking
TheChain.html on Monday, July 31, 2006.
Originally from Harpers, July 2006. By Barry C.
Lynn.
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since the great opening of global markets in the
early 1990s, the tendency within most of the
systems we rely on for manufactured goods,
processed commodities, and basic services has
been toward ever more extreme consolidation.
Consider raw materials three firms control
almost 75 percent of the global market in iron
ore. Consider manufacturing services Owens
Illinois has rolled up roughly half the global
capacity to supply glass containers. We see
extreme consolidation in heavy equipment General
Electric builds 60 percent of large gas turbines
as well as 60 percent of large wind turbines. In
processed materials Corning produces 60 percent
of the glass for flat-screen televisions. Even in
sneakers Nike and Adidas split a 60-percent
share of the global market. Consolidation reigns
in banking, meatpacking, oil refining, and
grains. It holds even in eyeglasses, a field in
which the Italian firm Luxottica has captured
control over five of the six national outlets in
the U.S. market.
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The stakes could not be higher. In systems where
oligopolies rule unchecked by the state,
competition itself is transformed from a
free-for-all into a kind of private-property
right, a license to the powerful to fence off
entire marketplaces, there to pit supplier
against supplier, community against community,
and worker against worker, for their own private
gain. When oligopolies rule unchecked by the
state, what is perverted is the free market
itself, and our freedom as individuals within the
economy and ultimately within our political
system as well.
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Trends in Aggregate Concentration in the United
States Lawrence J. WhiteThe Journal of
Economic Perspectives, Vol. 16, No. 4. (Autumn,
2002), pp. 137-160.
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During the merger wave of the 1980s, the total
value of mergers exceeded 200 billion per year
for a few years in the late 1980s and early
1990s. But from 1998 to 2000, the annual value
of large mergers was well over 1 trillion per
year, involving from 8,000 to 10,000 separate
deals each yearEven when the annual number or
value of these Large mergers is adjusted by
measures that reflect the larger size of the
U.S. economy, the merger wave of the late 1990s
looms large in historical perspectiveWhenever
the U.S. economy experiences major waves of
large mergers, as it clearly did in the 1980s
and 1990s, it is natural to wonder about the
structural consequences. Has the wave of mergers
in recent decades significantly changed the size
distribution of Large firms? Are the largest
firms in the economy growing relative to the
overall size of the economy? This article will
address these questions, employing two rarely
used data sets for the I980s and 1990s.
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