A supply curve indicates simply what a firm is willing to produce for a given price, everything else being equal. It is purely a conceptional tool, as reality corresponds to only one point on that line.
That point, jointly derived with demand, is the logical (even mechanical) consistent solution to these two assumptions - both supply and demand are sensitive and dependent on price.
Economies of scale relate to costs. They may, for example, be modeled by decreasing marginal costs.
If, for example, economies of scale increase, and costs are reduced, the supply curve will shift outward.
This then leads to a lower price. That is 100% conventional econ 101.
On the other hand, the supply curve, however it may look, already includes the economies of scale that presently exist - the whole dependence of supply and quantity. Economies of scale are, as such, compatible with standard supply curves, but nothing keeps you from using more complicated cost setups.
The point is just that a supply curve, just as a demand curve, is one functional (or relational) dependence at a given time. Any changes will shift these curves, as the underlying tradeoffs change.
Supply and demand curves are functions of price, however they only represent, not encode, the underlying behavior. It is absolutely standard to have pricing power in the market. The supply curve is then, of course, no longer a simple uni-dimensional affair. You can, however, still draw it as a function of other prices (for example).
Supply curves are not the underlying behavioral assumption, they are a useful representation thereof.
I'd argue, for example, that Cost+Markup is the most standard way, in economics, to model a firm's pricing behavior, such as in oligopoly models.
The valuable insight from economics, which generalizes the simple demand and supply curves, is that this Markup is not arbitrarily set, but depends both on demand and on other suppliers.
Without these simple mental models, many people come to wrong conclusions about what happens in markets!
> Without these simple mental models, many people come to wrong conclusions about what happens in markets!
It seems like that happens with or without the simple mental models. Put five economists in a room and you'll get five opinions.
I'd argue that one purpose the mathematical models do serve is to shut down disagreements from non-economists. Where there's a difference in opinion, the economist can (fallaciously) argue that "if you don't have a model, you don't have a point".
See some of the discussion around MMT for a practical example.
In contrast, I challenge you to put five economists into a room and ask a question about, say, auction theory. Do you still think you get five opinions?
> See some of the discussion around MMT for a practical example.
MMT is Macro, and Macro is bad. Any of it. The reason is that the assumptions of any Macro model, including MMT, are so excruciatingly far from reality that "formal theory" is difficult to do.
We have formal theory such that five economists who disagree know exactly where they disagree - on which assumption or axiom.
A theory that does not formulate out its assumptions or scope conditions, which sadly includes a lot of "heterodox models", can not be criticized at all. It may be right, it may be wrong, but we can find to common basis on which we agree or disagree.
> We have formal theory such that five economists who disagree know exactly where they disagree - on which assumption or axiom.
In practice economic debate usually degenerates into mud-slinging because there isn't a universal arbiter of what constitutes a good model. I don't think the saltwater-freshwater debate was particularly precise or reasoned.
Economies of scale relate to costs. They may, for example, be modeled by decreasing marginal costs.
If, for example, economies of scale increase, and costs are reduced, the supply curve will shift outward. This then leads to a lower price. That is 100% conventional econ 101.
On the other hand, the supply curve, however it may look, already includes the economies of scale that presently exist - the whole dependence of supply and quantity. Economies of scale are, as such, compatible with standard supply curves, but nothing keeps you from using more complicated cost setups.
The point is just that a supply curve, just as a demand curve, is one functional (or relational) dependence at a given time. Any changes will shift these curves, as the underlying tradeoffs change.
Supply and demand curves are functions of price, however they only represent, not encode, the underlying behavior. It is absolutely standard to have pricing power in the market. The supply curve is then, of course, no longer a simple uni-dimensional affair. You can, however, still draw it as a function of other prices (for example). Supply curves are not the underlying behavioral assumption, they are a useful representation thereof.
I'd argue, for example, that Cost+Markup is the most standard way, in economics, to model a firm's pricing behavior, such as in oligopoly models.
The valuable insight from economics, which generalizes the simple demand and supply curves, is that this Markup is not arbitrarily set, but depends both on demand and on other suppliers.
Without these simple mental models, many people come to wrong conclusions about what happens in markets!