Average Cost Curve Research Articles

Nonparametric Measures of Capacity Utilization of the Tunisian Manufacturing Industry: Short- and Long-Run Dual Approach

This paper tried to develop a nonparametric method of obtaining the minimum of the long-run average total cost curve of a firm to define its production capacity. It provided a benchmark for the measurement of the capacity utilization rate at the observed output level of the industry. In the case of the long-run constant returns to scale, the minimum of the short-run average total cost curve is determined to measure the short-run capacity utilization. When applied empirically, we measured the annual capacity utilization rates of the Tunisian manufacturing industry and its six sectors over the period 1961–2014. In addition, we developed a nonparametric analysis based on the data envelopment analysis methodology for the quasi-fixed capital factor of the short-run average total cost curve with variable returns to scale using an iterative search procedure. From the estimated results of the capacity utilization, we noticed a significant under-utilization of the production capacity in the manufacturing sector.

Farm Growth: Challenges and Opportunities

Farm size and growth are often discussed in the context of economies of size. Previous research suggests that the average cost curve in production agriculture is downward sloping or at a minimum Lshaped (Langemeier, 2013). Thus, in general, larger businesses have lower costs of production. Other motivations for farm growth include to provide opportunities to more fully employ the skill sets of managers, to add family members to the operation, and to receive better prices on inputs and products sold. In fact, farm growth is a “natural phenomena”, in part because successful farm businesses have earnings that they must deploy, and using these earnings to expand the farm business is a logical choice.

The estimation of minimum efficient scale of the port industry

Terminal scale has been the subject of discrete episodes of hotly contested policy debates. From the perspective of port authorities or governments, knowing the Minimum Efficient Scale (MES) is salient, because they sometimes determine the port development or expansion based on the port capacity or the existing size of the terminal. Notwithstanding the importance of knowing the exact MES, extant literature has not managed to estimate MES in the port industry. This study aims to estimate the MES in the port industry in South Korea in order to identify whether Container Terminal Operators (CTOs) are under economies of scale, constant economies of scale or diseconomies of scale; we explore a bottom point of the average cost curve in order to suggest an adequate scale for the port industry in Korea. The finding demonstrates that undercapacity may be a strong issue in Korean container ports. However, CTOs in Busan port are in an overcapacity area given the market demand of container throughput in 2013, which is approximately 25 times larger than the estimated MES; in fact, all CTOs in Busan port operate at more than 20% of MES. This study then can provide port policy makers with a helpful tool to derive ex-ante MES level at the terminal designing stage and to adjust ex-post port investment decisions at the additional port capacity designing stage, which may contribute to avoiding overcapacity.

The Hayek Hypothesis and Long‐Run Competitive Equilibrium: An Experimental Investigation

We report on an experiment investigating whether the Hayak Hypothesis (Smith, 1982) extends to the long run setting. We consider two environments; one with a common production technology having a U-shaped long run average cost curve and a single competitive equilibrium, and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria. While there is convergence in both environments to the long run equilibrium, it takes longer and is less robust than usually observed in the short run setting. We show that price formation is adaptive and quickly converges to realized short run equilibrium, but long run investment decisions exhibit very limited rationality. We present and estimate an investment choice model that shows that only minimal rationality, coupled with repeated decisions, is enough to achieve high long run allocative eciency when markets use continuous double auctions. JEL classication: C92; D02

Short-Run Cost Minimization and Capacity Utilization of Regional Public Hospitals in South Korea

This paper intends to obtain the short-run average cost minimization and capacity utilization over 34 regional public hospitals in South Korea from 2007 to 2010 using Data Envelopment Analysis (DEA). Also, it explores the average cost for each hospital in order to determine whether the cost is increasing or decreasing. The annual capacity utilization rate, using an adjusted number of patients as an output, was 0.49, and by using value added as an output was 0.56, on average. Only Jeju showed the highest level of capacity utilization regardless of output type. It indicates that almost all regional public hospitals, except for Jeju, have not run with full capacity, and have been in the decreasing area in the short-run average cost curve during the same period.

The False Economic Rent Theory

This paper proves that the so-called marginal cost curve in the traditional monopoly model is a false image built on some wasteful experimental average cost curve. This paper then reveals the ugly but true picture of monopolists, and proves that they will not be satisfied with such limited economic rent, but rather they plunder for unlimited monopolist profit. This paper concludes with the comment of how the false rent concepts have been abused to kill people and confiscate their properties.

The Odyssey of Economies of Scale

This paper disproves the U-shape long run average cost curve, for a firm must choose its lowest point to operate from the outset. It also clarifies the meaning of short and long run. Instead of using these layman jargon, professional economists should employ calculus to solve for partial or general equilibrium.

Did the Big Stick Work? An Empirical Assessment of Scale Economies and the Queensland Forced Amalgamation Program

In 2007, the Queensland Government imposed forced amalgamation with the number of local authorities falling from 157 to just 73 councils. Amalgamation was based inter alia on the assumption that increased economies of scale would generate savings. This paper empirically examines pre- and post-amalgamation (2006/07 and 2009/10) for scale economies. For the 2006/07 data, evidence of economies of scale was found for councils with populations up to 98,000, and thereafter diseconomies of scale. Eight percent of councils in 2006/07 (ten councils) – representing 64% of the state’s population – exhibited diseconomies of scale. For the 2009/10 data, the average cost curve remained almost stationary at 99,000 residents per council, but almost 25% of all councils (thirteen councils) were now found to exhibit diseconomies of scale. The compulsory merger program thus increased the proportion of Queensland residents in councils operating with diseconomies of scale to 84%.

An inquiry into the cost structure of state transport undertakings in India

This paper examines the cost structure particularly cost elasticities, returns to scale, marginal cost of production, technological progress, demand for factor of production, and factor substitution in publicly owned State Transport Undertakings (STUs) in India. To examine these issues, a translog cost function is estimated jointly with factor share equations subject to required coefficient restrictions by using the method of ‘Zellner’s iterative’ technique using the annual data of 11 STUs from 2000–01 to 2010–11. We find that the cost function is fully separable between time (technology) and its other arguments; therefore, technological progress experienced by STUs is (Hicks) neutral and returns to scale depends on output alone. Further analysis reveals that the average cost curve for STUs is U-shaped and it is increasing for the mean firm; consequently, large and medium size STUs are operating on diseconomies of scale whereas relatively small size STUs are experiencing economies of scale. We also examined the technological progress that STUs have enjoyed over time. It is found that the technological progress is same across STUs, though diminishing over time. STUs’ cost savings due to technological progress has reduced from 2.1% of the total cost in 2000–01 to 1.3% of the total cost in 2010–11. Finally, we analyzed price elasticities of input demand and elasticity of substitution. It is found that all input demands are price inelastic and cross-price effect is not very strong. Since all own-partial elasticities of substitution are negative, hence, as required, the postulates of the cost minimizing factor demand theory are satisfied.

Are There Economies of Scale in Highway Maintenance? What about Costs Due to Market Power?

The object of this paper is to determine whether there are economies or diseconomies of scale in highway maintenance and whether higher concentration levels/greater market power across the governments involved in highway maintenance results in higher or lower cost levels. The data used come from New York State municipalities. New York is divided into Towns and Cities that added together give the total land area for the State. There are also Villages that are located in one or more Towns. All of these government entities may own and manage/maintain highways. The results are that 1) there are significantly U-shaped average cost curves, but the differences in average costs between communities with lower numbers or higher numbers of lane miles than the most efficient are not very great and 2) there are both substantial and significant increases in average costs when market power is greater. Thus, making the case for mergers of communities is more difficult and such mergers would be more problematic.

The Optimal Size of German Child Care Centers and the Impact of Regulation: Estimating the Cost Function of a Regulated Multi-Product Firm

Summary Using a unique data set on German child care centers, we estimate a long-run multi-product cost function for child care provision in Germanywhile taking into account legal minimal labor input restrictions. For a representative child care center we find economies of scale, a U-shaped average cost curve, and indications of diseconomies of scope. The legally stipulated minimum child-to-staff ratio is manifested in a positive Lagrange multiplier, showing that modeling legal restrictions is necessary to avoid misspecification error. Our study provides a useful tool for policymakers in estimating the effects of future demographic change on child care costs.

CREDIT FRICTIONS AND FIRM DYNAMICS

In this paper I develop a dynamic stochastic general equilibrium model of credit frictions in which the production technology provides a U-shaped average cost curve, enabling endogenous solutions for firm size and quantity. Firms weigh the present value of future net revenues against the opportunity cost of staying in business in their entry or exit decisions. I find that credit frictions increase variable investment costs and result in a larger firm size and a smaller number of firms in the steady state. As the economy deviates from the steady state, however, the presence of credit frictions increases fluctuation in the number of firms, raising market entry during an economic upturn and market exit during a downturn. Also, I find that allowing free entry mitigates some of the effects of credit frictions due to macroeconomic fluctuations. In addition to the homogeneous-firm model, I examine the model when firms have heterogeneous access to credit and find that different credit access gives rise to different firm sizes in the steady state. Firms with easier access to credit become larger than those with less access to credit. Heterogeneous credit access also means that these two types of firms will respond differently to a common technology shock.

Technoeconomic analysis of wheat straw densification in the Canadian Prairie Province of Manitoba

This study presents a technoeconomic analysis of wheat straw densification in Canada’s prairie province of Manitoba as an integral part of biomass-to-cellulosic-ethanol infrastructure. Costs of wheat straw bale and pellet transportation and densification are analysed, including densification plant profitability. Wheat straw collection radius increases nonlinearly with pellet plant capacity, from 9.2 to 37km for a 2–35tonnesh−1 plant. Bales are cheaper under 250km, beyond which the cheapest feedstocks are pellets from the largest pellet plant that can be built to exploit economies of scale. Feedstocks account for the largest percentage of variable costs. Marginal and average cost curves suggest Manitoba could support a pellet plant up to 35tonnesh−1. Operating below capacity (75–50%) significantly erodes a plant’s net present value (NPV). Smaller plants require higher NPV break-even prices. Very large plants have considerable risk under low pellet prices and increased processing costs.

Capacity growth and utilisation performance under econometric framework: a case study on Indian glass industry

This analytical paper attempts to assess and analyse trend growth in the rate of capacity utilisation (CU) in India’s glass sector at aggregate level over a period from 1979–1980 to 2003–2004. In this study, optimal output is defined as the minimum point on the firm’s short-run average total cost curve and the rate of CU is merely ratio of its actual output to capacity output level. Choice theoretic framework is adopted to estimate the optimal capacity output. The empirical findings suggest that there exist considerable variations in the CU rates over years within same industry. There has been declining trend in the growth rate of CU in this industry during post-reforms period due to sluggish growth in actual output resulting from stagnated demand probably and rapid expansion of capacity output as a result of abolition of licensing rule consequent to economic reform.

The Hayek Hypothesis and Long Run Competitive Equilibrium: An Experimental Investigation

We report on an experiment investigating whether the Hayak Hypothesis (Smith, 1982) extends to the long run setting. We consider two environments; one with a common production technology having a U-shaped long run average cost curve and a single competitive equilibrium, and another with a common constant returns to scale technology having a constant long run average cost curve and multiple competitive equilibria. While there is convergence in both environments to the long run equilibrium, it takes longer and is less robust than usually observed in the short run setting. We show that price formation is adaptive and quickly converges to realized short run equilibrium, but long run investment decisions exhibit very limited rationality. We present and estimate an investment choice model that shows that only minimal rationality, coupled with repeated decisions, is enough to achieve high long run allocative efficiency when markets use continuous double auctions.

Economic Efficiency in Indian Rubber Industry

The article tries to assess the utilization efficiency of capacity of Indian rubber industry in terms of econometric framework for the period, 1979-80 to 2008-09. Capacity output has been obtained at the minimum point of short run average cost curve. The result suggests that there has been declining growth rate of capacity utilization in rubber industry of India during the post reforms period accompanied by declining output growth as well as capacity growth. There exists some excess capacity in the rubber industry which remains unutilized during our study period. The result exhibits that high correlation coefficient between actual output and capacity output for Indian rubber sector implies that major part of under utilization of capacity is intended and low correlation between capacity expansion (CE) and past utilization(CUL) seems to suggest that under utilization, if any, is mainly of the unintended nature, capacity expansions do not move in line with past utilization rates and it also indicates that abolition of restrictions on licensing due to trade liberalization do not help industry to expand capacity. On the other hand, low correlation between capacity expansion (CE) and lagged output (QL ) indicates that unintended excess capacity is varying from year to year in an unsystematic matter.

Market Structure And Banking Production Economies: Evidence From The 1980s Deregulation

This study examines the changes in the cost structure of banking firms using data from pre and post deregulation periods. A translog cost function is utilized for the analyses of economies of scale and scope. The results indicate that the average cost curves, although U-shaped flattened over time, resulting in an increase in optimal bank size. Economies of scope that existed prior to deregulation appears to be exhausted in a more nonconstrained environment.

Rothbard on V Shaped Average and Total Cost Curves

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.

A Keynes-Robinson Controversy: A Methodological Matter

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">This paper examines a minor methodological foray by Keynes:<span style="mso-spacerun: yes;">  </span>his 1941 reaction to what is now a well-known conclusion of price theory, the so-called “below-capacity theorem” first advanced by Joan Robinson’s 1933 Economics of Imperfect Competition.<span style="mso-spacerun: yes;">  </span>By the graphical analysis that has now become universal, the theorem “proves” that any profit-maximizing firm faced with a downward-sloping demand curve will produce to the left of the average cost curve’s lowest point, the difference between this lowest-cost output and the output determined by MC=MR being a measure of excess capacity.<span style="mso-spacerun: yes;">  </span>The paper will conclude that Keynes’ denigration of the theorem is wholly due to his different cast of mind, to a methodology that preferred observation and history over deductive methods.<span style="mso-spacerun: yes;">  </span></span></span></p>

Workers’ Remittances to India: An Examination of Transfer Cost and Efficiency

AbstractRegarding the time efficiency of remittance transfer channels to India, the evidence suggests that traditional banking instruments are relatively inefficient as compared to the new information technology‐enabled products. Transfer arrangement of the Indian banks with overseas exchange houses has reduced the settlement cycle and the cost. Both the banks and money transfer operators (MTOs) are able to keep the transaction cycle low through the use of information technology‐enabled formats. Given that the average cost curve of the banks is located to the right of the average cost curve of the MTOs, greater potential exists for the improvement in overall efficiency of the two entities, particularly through the sharing of messaging and the access and disbursement networks to reduce the overhead cost. The estimates of error correction model reveal that the transaction fee and payment infrastructure are significant determinants of remittance flows, underscoring the scope of policy measures in influencing remittance inflows. The estimates indicate that over the medium to long‐term horizon, transaction cost emerges as the most dominant variable explaining the variation in remittances. The payments infrastructure also explains about 10 per cent variation in remittances over the medium‐term. The impulse response analysis further reveals that the favourable shocks to transaction fees and the payments infrastructure cause steady improvement in remittance inflows over the medium‐term horizon, thus underlining the importance of cost and efficiency in affecting the workers’ remittances.