Rothbard on V Shaped Average and Total Cost Curves

6 Pages Posted: 8 Jul 2011

See all articles by Walter E. Block

Walter E. Block

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business

Date Written: July 6, 2011

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.

Suggested Citation

Block, Walter E., Rothbard on V Shaped Average and Total Cost Curves (July 6, 2011). Available at SSRN: https://ssrn.com/abstract=1880103 or http://dx.doi.org/10.2139/ssrn.1880103

Walter E. Block (Contact Author)

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business ( email )

6363 St. Charles Avenue
Box 15, Miller 321
New Orleans, LA 70118
United States
(504) 864-7944 (Phone)
(504) 864-7970 (Fax)

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