Summary:
Economics textbooks transmogrifying truth
Perfect competition idealizes the very small firm, its growth constrained by rising AVC [Average Variable Cost] as it expands output. But why does AVC rise? And why does it rise to such an extent that it outweighs declining AFC [Average Fixed Cost], resulting in the U-shaped cost curve? Current textbooks do not supply an explanation. For example, N. Gregory Mankiw, in his Principles of Microeconomics, simply states that the cost curve is U-shaped—representing “cost curves for a typical firm”30—and illustrates this “principle” with made-up numbers for a hypothetical coffee shop in which AVC increases from %excerpt%.30 for an output of one cup of coffee to .00 for an output of ten cups, with rising AVC surpassing
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Economics
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Economics textbooks transmogrifying truth
Perfect competition idealizes the very small firm, its growth constrained by rising AVC [Average Variable Cost] as it expands output. But why does AVC rise? And why does it rise to such an extent that it outweighs declining AFC [Average Fixed Cost], resulting in the U-shaped cost curve? Current textbooks do not supply an explanation. For example, N. Gregory Mankiw, in his Principles of Microeconomics, simply states that the cost curve is U-shaped—representing “cost curves for a typical firm”30—and illustrates this “principle” with made-up numbers for a hypothetical coffee shop in which AVC increases from $0.30 for an output of one cup of coffee to $12.00 for an output of ten cups, with rising AVC surpassing declining AFC after six cups.31 Similarly, Paul Krugman and Robin Wells, in their Essentials of Economics, argue that a “realistic marginal cost curve has a ’swoosh’ shape”32 and give the example of a salsa maker whose AVC rises from $12.00 for an output of one case of salsa to $120.00 for an output of ten cases, with rising AVC surpassing declining AFC after an output of three cases.33 Be it Mankiw or Krugman/Wells or a slew of other prominent economists who compete in the introductory principles market, the textbook “explanation” for the U-shaped cost curve is simply a made-up numerical example! They make no attempt to explain to students what constrains the growth of the firm.
William Lazonick
Indeed not much of an explanation of what is arguably the most important principle of the neoclassical theory of the firm!
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