Rothbard on V Shaped Average and Total Cost Curves

Abstract

Rothbard (1993, pp. 638-45) refuted the important economic fallacy that excess capacity is a normal consequence of profit maximizing behavior by businesses in some industries when they are in long-run equilibrium. And, in so doing provided a manifest example of misuse of mathematics in modern economics.According to standard theory, given a U-shaped, average-cost curve (ACC), in equilibrium, a firm whose demand is perfectly competitive will operate at the point where its horizontal demand curve is just tangent to the ACC; i.e., at the point where average cost (AC) is at its minimum. Alternatively, a firm in an industry characterized by monopolistic competition will face a downward-sloping demand curve. In that case, again in equilibrium, the firm will operate where the demand curve is just tangent to the U-shaped ACC. However, in that case, the point of tangency will occur at lesser quantity than that at which AC is at its minimum.