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Can You Explain Modern Theory Of Costs?

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Muhammad Abdullah786 Profile
So many economists like Stigler has objected the you shaped of traditional cost curves. According to the classical economists each plant ensured short run can produce only a specific level of output. If more than this output is produced the cost of production will rise. On the other hand modern economists are of the opinion that whenever a firm installs a plant this plant has some more capacity or reserve capacity to produce in addition to a specific level of output. Thus the modern cost curves are based upon the idea of reserve capacity.

On the basics of reserve capacity the producer can meet the seasonal and cyclical changes in the demand for his goods.Each producer thinks that the demand for his product will rise in future. Therefore it is possible only if the producer is having reserve capacity. If a producer does not have reserve capacity his rivals will take the advantages of increased demand.

So many big plants like cement plant motor plant and atomic plant etc are available after a time. Therefore to place order for such big plants not only the present demand but the future demand is also considered. Then any person undertakes business it does have a reserve capacity in building as well as in land.
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Anonymous answered
Cost is constant and be called price when it has to do with goods. Variable, fixed, average fixed cost and ect....

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