Saturday, September 10, 2005

Are all Fixed Costs Sunk?

Drinking again with El Doctor, but this time closer to home. I had sent him my last(Sept 9th) post, and asked him what he be thinking.
He criticized my post for not including the idea of short-run long-run fallacy. He asked: What is a Short-run today? The network effects, technology and a global market for goods and labor puts us in the long run. We get our goods from China. We get services from India. So where is the fixed resources to cause diminishing returns?.
So El Doctor argues for the long-run flat to a downward sloping supply curve! He pointed to the telecom industry as soon as they laid down their lines the price for their lines fell. As they increased quantity supplied (in the long-run) the price were going down. For those who have forgotten this supply curve, it is usually taught in the chapter on perfect competition under the long-run senario.
My contribution to this discussion of ours was the following jingo: all fixed costs sink fast.

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