I came across a question stating that an industry has been consistently producing an increasing number of a certain good over a period, but with prices unchanged over that period. I would’ve thought that this would be a constant cost industry, but the answer is decreasing cost industry.
The explanation states that because output has increased with prices the same, firms are able to sell more at the same price due to decreased costs.
Could someone explain this logic for me, or is it safe to assume that this is an error or that the problem makers were being over-technical?
This is due to the experience curve phenomena which states that a doubling in output decreases the costs by 1/3. The reason is basically economies of scale and economies of scope.
Sorry could you please elaborate? Is this experience curve phenomenon not affected by whether the industry in question is decreasing-cost / constant-cost / increasing-cost?
If the experience curve phenomenon is independent of the type of industry, then what exactly are they referring to when they talk about decreasing/constant/increasing-cost?
The books make it seem more complicated than it is.
imagine you are producing goods and selling 100 goods per month out of a warehouse. Now imagine selling 100000 goods per month. Think about what will happen as you sell more goods. The warehouse is a fixed cost whether you’re renting or buying, say 1000 in cost per month. If you apply that cost to 100 goods it is much higher than applying the cost across 100000. In addition, as you sell more and revenues increase, The fixed costs per unit goes down and variable costs become increasingly more important which leads into the importance of contribution margin as your variable costs are the majority of costs on a per unit basis. However, on a total basis, because fixed costs remain the same, the per unit cost goes down as you produce more, leading to efficiency and economies of scale.