Quick basic problem to do, for you ECon majors regarding MARginal COSt curves

[kaiotes]

i'm do'n this prob where it involves a decreasing cost industry.
i need to draw the marginal cost curve to solve later parts of the prob.
so since its decreasing, the curve would still be up right shaped but very flat or would it ever look like a demand curve?
the notion that its decreasing cost makes me want to draw it like a demand curve.
any suggestions??

 

[linuxboy]

depends on the VC curve. Since FC is a line and TC is a function of VC, your MC is tied in to the VC. It can't look like a demand curve just because there's a point of diminishing returns, hence the name MC. Well actually, depends on the demand curve. Once can fabricate any data to ones liking.


Cheers !

 

[BrunoPuntzJones]

what linux boy said, and remember to take into account that MC only can decrease so much before it will jump back up (production capacity reached and have to build a new factory, or hire new workers, or extra machinery, etc.).

 

[HamSupLo]

kaitoes, it's u again! got anymore specifics for the problem? what class is this? econ 11?

 

[kaiotes]

basically i know it starts going up, but can it also go down as in upside down U shape for MC curve?

 

[linuxboy]

basically i know it starts going up, but can it also go down as in upside down U shape for MC curve?


I don't quite follow. The idea of MC is that it decreases because you are able to gain marginal utility with minimal addition of variable cost since fixed cost is fixed. Like, BrunoPuntzJones said, it will jump up since there is a limitation. That's why the cost increases. I guess I'm having trouble understanding where you're having difficulty. Post more and Helpless should come around to give a better answer. He has a MS in econ whereas I do not.


Cheers !

 

[kaiotes]

basically we're doing curves about incrsaseing cost industry, and decreasing cost industry as to what would happen to a firm and the market in a competitive industry.
in text there is an example of decreasing cost industry but its very brief, didn't show effect for the firm, just the market.
for market, price of good actually goes up for SR, i thought if its decraseing cost industry, shouldn't price go down???

as for graph, i'm supposed to draw all the curves, like the AC and MC for the firm and SR and LR for Market?
since its decreasing cost, right now i'm thinking MC would first go up, then it will reach peak and be even?
like image below?
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image is crappy as HTML won't let me put the spaces...

just got up, go to to go to that class now will be back later.

 

[HamSupLo]

the graph to your problem is here.

In graph 1, the firm is the only one in the market and is making zero profit where P=MC. Demand for the good shifts price up in the short run. In graph 2, othe firms enter the market for the piece of the profit. Since it's a decreasing cost assumption, you can see the firm's costs curves are lower since additional firms create a larger pool of resources for everyone. In graph 3, there's more firms so more goods and the supply curve shifts out. I forgot to draw a LR supply curve, but you can do that by connecting the two SR supply curves in graph 3.

Now Paypal me 20 bucks kaiotes.

 

[kaiotes]

let me make sure i get this, so in decreasing cost, it still is upright MC curve, except it is just lower?
what i'm confused is you know how it has P2 and Q2, it seems that cost is going up. why is that? i thought we're in a decreasing cost industry
SMC stands for Shortrun marginal cost? we haven't used that term, so i'm going to assume that. has very 'high' slope because its decreasing cost industry?
is that statement i just made correct?
basically i don't get why it first goes to P2 , as this seems the price is going up than down, doesn't decreasing cost means cost is going down?

 

[HamSupLo]

Kaitoes, stop focusing on just the MC so much. Look at the model from a larger perspective. The focus of the problem is on the market as a whole when competition is introduced. we want to see how prices and quantity are determined.

in text there is an example of decreasing cost industry but its very brief, didn't show effect for the firm, just the market. for market, price of good actually goes up for SR.

well, we start off with one firm. demand for that firm's good rises and since there's only one firm producing, price goes up but that is only briefly because once word of profit goes out, other firms enter the market. this point is very important in the model in explaining why price goes to P2.

what i'm confused is you know how it has P2 and Q2, it seems that cost is going up. why is that?

costs haven't gone up. the cost curves are still the same. price for the firm's good has gone up because of the reason stated above.

let me make sure i get this, so in decreasing cost, it still is upright MC curve, except it is just lower?

like i said, you're missing the big picture by just focusing on the firm's MC curve. remember, it's decreasing cost industry. The entire cost structure for all firms goes down. so all curves start lower. If the problem mentioned increasing cost industry, you just draw the cost curves higher in graph 2.

 

[kaiotes]

and for decreasing cost industry it is also possible that the MC and AC curve can shift to the right
way you explained it above made it much clearer.