Monday, 25 November 2013

I don't follow this argument

This article in the Guardian states,
Joffe [Michael Joffe, professor of economics at Imperial College, London] said university economics department were continuing to teach concepts that had been disproved. In one example he said the idea that companies suffer "dis-economies of scale" when they increase production beyond certain capacity was true in only a small number of firms.

The U-shaped curve shows that unit costs are high when production begins and become cheaper as economies of scale allow a company to spread costs over more units. Units become more expensive to produce after a factory reaches capacity.

Joffe said: "We ought to stop teaching the U shape as the typical relationship between costs and scale, for the simple reason that it is false."
What does this imply? Is Joffe really saying that he thinks all firms are natural monopolies? I think that is what Joffe's comment leads to. If firm's average cost curves are not U-shaped then I assume they are downward sloping over the relevant range and this implies that firms are natural monopolies. Now this may be true for some firms but I can't  see it as true in general. Is your local dairy really a natural monopoly?

No comments: