Last updated: March 20, 2019
Topic: Law
Sample donated:

Long run average curve

Nationalized industries are usually capital intensive thus in the long run because of scale of economies they should enjoy falling average costs. This situation also ensures a falling marginal cost curve which creates a problem for the marginal cost is equal to price relationship.

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According to Philip & Michael   (1977), at a certain price, the industry makes a loss which would have to be financed out of tax revenues a situation creating two worries. When because of scale of economies, marginal cost rather than rising, continue to fall, the competitive rule of equating marginal cost with price or average revenue will result in a loss.

There is redistribution of income from the tax payer to the consumer on no obvious criteria of equity, need or resource allocation.

Price policy might become a facet of taxation policy which is a piece of economic irrationality.

Average fixed cost continually declines as output expands.

Because of the law of diminishing returns, both average variable cost and average cost decrease at first then increase as more output per week is produced in the plant.

In this case, a decrease in the price of a variable input shifts both the marginal and average cost curves downward. Market supply increases and the price of the product declines. As economic integration lowers average costs of production and increases competition, prices will fall and output will also increase.

Improvements in technology lower the minimum possible average cost of producing an item. This results to expansion to expansion of the industry and a decline in market price until price equals the lower minimum possible average cost.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Philip, W.B & Michael, P.T (1977). Economic theory (1st edit).India.