Factor Prices and the Shape of Average Cost Curves with Special References To International Trade

Abstract

This paper shows that the shapes of average cost and marginal cost curves and the possibility of scale economies can be quite sensitive to factor price configuration. We illustrate our analysis in terms of international competitiveness. Since the days of Frank Knight (1921) and Jacob Viner (1931), microeconomic analysis in terms of the usual U-shaped average cost curve and the marginal cost curve (which passes through the minimum point of the AC curve) has become a com mon intellectual tool of economists, and the analysis in terms of these devices has pro duced a bulk of interesting and fruitful results. Today, students in economics learn this apparatus early and virtually all intermediate price theory textbooks contain a discus sion of such cost curves and their applications. Needless to say, it is well-known that the shape of the AC curve is not necessarily U-shaped. For example, any homogeneous production function does not yield U-shaped AC curve (under any factor price configurations).1 It is also well-known that the shape of the average and the marginal cost curves depend on factor prices as well as output, and hence any change in factor prices would shift these curves. On the other hand, it is not well-recognized that a slight change in factor prices can result in a drastic change in the AC rather than a simple shift. In this paper, we intend to show, by way of simple