Comment by mitthrowaway2

Comment by mitthrowaway2 3 days ago

> It's absolutely a bathtub.

I endeavour to convince you that you are teaching your students a falsehood. Natural resource industries have bathtub-shaped average costs. Average costs fall strictly monotonically for manufacturing, and marginal costs either fall or remain constant. Constant marginal costs are what you get if you don't even bother to solve coordination problems, and just copy-and-paste your whole assembly line instead (except even then you can't help but gain economies of scale, if only from your tooling suppliers). The misconception that it's a bathtub does not come from the study of manufactured goods, it comes from thought experiments about manufactured goods done by people who never managed quote requests at a real factory. Empirical studies done on actual firms almost never show rising marginal costs at any quantity.

That this error has permeated introductory economics is a very, very big problem.

mlyle 2 days ago

> Constant marginal costs are what you get if you don't even bother to solve coordination problems

You still have coordination problems on the supply and distribution side.

> Average costs fall strictly monotonically for manufacturing

This is an extraordinary claim that is easy to refute with simple thought experiments. e.g. You think that if I want 103% of the units that a set of equipment from ASML can deliver, that average costs will be lower than producing 100%? Or do you mean "strictly monotonically" in some other sense?

Being able to vary your capital in the long run doesn't mean that you can have 10.3 sets of photolithography apparatus.

> and just copy-and-paste your whole assembly line instead

If you copy and paste and have everything truly independent, without the need for any coordination of resources, what you effectively have is multiple firms. In practice, firms still need to allocate scarce resources among lines.

> The misconception that it's a bathtub does not come from the study of manufactured goods , it comes from thought experiments about manufactured goods

This is a falsehood. Bain conducted reams of real-world research on manufacturing, plant size, firm size, and returns to scale, and this informs today's idea of LRAC. Of course, this research is 70 years old, and recent data is more ambiguous. As I've said, some believe that information technology has changed everything.

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dr_dshiv 2 days ago

I’ve been interested in Henry Charles Carey, the chief economic advisor to Abraham Lincoln. He wrote a book called the “Harmony of Interests” about the need for state policy + markets (to contrast with purely free markets). Lots of data and rigorous argumentation.
Apparently this was known as the “American School” of economics — and it dominated from the mid-late 1800s for over a century.

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kragen 2 days ago

it seems that you both agree that it depends on the timescale; asml's next model of machine may be able to produce 10% more, or 91% less, and in either case that extra 3% of your demand will lower the average costs

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labcomputer 2 days ago

> and marginal costs either fall or remain constant

Not true. If your factory can make N widgets per year, and you want to make N+1 widgets, the marginal cost of the N+1th widget is vastly greater than the Nth widget.

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hyeonwho4 2 days ago

I think the parent comment was talking about building factories and amortizing their costs over your unit production, whereas you assume the factory is a fixed cost with fixed capacity and looking at the marginal cost to produce a unit, which is really rare in many real world situations.
For most goods, the factory doesn't run anywhere near N, and the fixed costs are 6 or more orders of magnitude higher than the marginal widget costs, so your business is well served just by finding any method to use that plant more effectivly. As an example, I was quoted $60,000 for a mold which would have produced parts at $0.005. (Very small plastic widgets.) At that ratio, any amount of scale will increase my profit, since the marginal costs, even if they increase by a factor of 10 or 100, are negligible to the cost of the tooling. (And the global market for this widget is measured in hundreds of units.) Any amount of reusing the mold is going to save me money. Sure we have problems if we need N+1 widgets in less than 1/N more time, but if we expected to need 2N widgets, we could reuse the tooling design at a second factory, and marginal costs actually do keep dropping.

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mitthrowaway2 2 days ago

But in real life, by the time you received orders for N/2 widgets, you were already breaking ground on your next factory. And if you get an order for 100N, you smile because now you can switch to a higher productivity manufacturing method, like stamping instead of machining; at 10000N you can invest in mass-producing the machines-that-make-the-machines. This is how we end up being able to make even complex products like cars so cheaply that we have more cars than people.

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