298. Joan Robinson to Harrod , [21-23 March 1933] [a]

[Replies to 297 , answered by 299 ]

3, Trumpington Street, Cambridge #

[21-23 March 1933] [1]

Dear Roy

I do not think there is any disagreement between us. In the enclosed picture the industry is just not expanding, i.e. the demand curve is a tangent to the Robinson Average Cost Curve, but the firm has passed the minimum point on the Harrod Average Cost Curve.

As you say, it may, or may not. The chance of it doing so obviously depends upon the difference between the two average cost curves, which measures the difficulty of entering the trade.

A firm which is in already has an advantage over one that is not in, and like any other kind of differential advantage (e.g. a more intelligent management) this increases the size of the firm.

You say that my average cost curve is irrelevant, but it is relevant to the construction of the industry supply curve (the purpose for which I use it [2] ) as it sets the upper limit to the price. Your curve does not bear any particular relation to the price.

As soon as the demand curve falls below the position in which I have drawn it output is determined solely by marginal revenue & marginal cost & there is no one "equilibrium size" of the firm, but a different size for each position of the demand curve.

If competition is perfect the firms must be of more than optimum size when there is not free entry.

I do not quite know what we are supposed to be quarrelling about?

Yours

Joan

[fig. 1] Firms just not entering.

Existing firms more than optimum size.

If demand curve falls retaining same elasticity (at each price) output of firms will decline. If elasticity is [b] sufficiently increased output of firms may increase.

  1. 1. Undated. The range is inferred from the logical sequence of the letters in the exchange.

    2. Having proved that when imperfect competition prevails, in equilibrium firms must be subject to decreasing costs, Robinson aimed at examining whether a fall in the average cost for the firm due to an increase in the total demand for a commodity implied a fall in the supply price of the commodity: "Imperfect Competition and Falling Supply Price" (1932), pp. 550-52. Later, in a note replying to "A Further Note on Decreasing Costs" where Harrod restated the arguments put forward in this exchange of correspondence (Harrod 1933:7 ), Joan Robinson better specified the purpose for which her definition of "normal profits" was adopted ("Decreasing Costs: A Reply to Mr. Harrod", Economic Journal XLIII, September 1933, p. 531); she later expanded her argument in "What is Perfect Competition?", Quarterly Journal of Economics XLIX:1, November 1934, pp. 104-20.

    1. a. ALS, four pages on a single folded sheet, plus a commented diagram attached on a single page, in HP IV-1089-1107. Reproduced by kind permission of the Provost and Scholars, King's College, Cambridge.

      b. Ms: «elasticity sufficiently increased».


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