TITLE:
The Economics of Business Cycles Numerical Model Role of Fixed Costs
AUTHORS:
Gerald Aranoff
KEYWORDS:
Business Cycle, Numerical Model, Manufacturing, Marginal-Cost Pricing, Idle Capacity
JOURNAL NAME:
Modern Economy,
Vol.11 No.2,
February
27,
2020
ABSTRACT: This paper presents a simple numerical model of the
economics of business cycles with illustrated demand and cost curves. This is a purely theoretical model inspired by the
writings of John M. Clark (1884-1963). The model shows industry long-run
equilibrium () under perfect competition for manufacturers to
supply hypothetical fluctuating demand schedules, off-peak and peak, for a single non-durable product such
as cement. The model has two plant types: old high fixed-cost PlantL and modern low fixed-cost
PlantK. The model assumes
linear total cost curves with absolute capacity limits for the two plant types.
Both plant types have the same SACmin. Under perfect competition neither plant type will dominate. The plant assets are
assumed durable, to last for 50 years, and specific to manufacturing only one product, Q. The model, with its rigid
assumptions, shows that industry composed of only modern low fixed-cost PlantsK will increase the amplitude
of the business cycle, the range of industry outputs between peak and off-peak,
versus an industry composed of only old high fixed-cost PlantsL. The
implication is that under conditions of perfect competition and the model,
reduction of fixed costs even while not reducing the SACmin—will lead to wider amplitude business cycles. The model shows a positive aspect of fixed costs:
that one can expect that industry with high fixed costs to have reduced
amplitude of the business cycle. Fixed costs in the model narrow the output levels between the trough and
the peak of the business cycle. Some may find this a surprising result.