First contribution here but I’ve been lurking since the move from Overcoming Bias. Play nice :) I think this is an important
subject matter which few people are giving attention to so I thought I’d offer some comments that might assist.
My comment was deemed too long so I’ve Split it up. If that’s bad form let me know. Considered removing quotations of the OP but it would make it too difficult to read.
If you are going to use pieces of standard microeconomics in future versions of this analysis
it might be best to spend a bit more time defining them more clearly and explaining how they map to
the subject. If there is any confusion in the assumptions contained in the theory it carries through
to the analysis of the case in question. It may well all be clear in your mind but it doesn’t seem,
at least to me, to unfold clearly in the text. But it might just be me...
Some examples
From #1
But the short run looks very different from the long run.
A key difference is that in the short run, suppliers cannot
undertake fixed costs of capital investment and research to improve
technology. In the long run, they can. Therefore, if some type of good
is a lot easier to produce in bulk than in small quantities, then in the
long run larger demand would lead to lower prices, because suppliers have
lower production costs. For goods that enjoy efficiencies of scale in large-volume production,
therefore, the long-run supply curve would be downward-sloping. An industry of this sort is called a
decreasing cost industry
As you point out, in the short run, producers cannot immediately alter their fixed cost inputs
e.g. new factories (r&d is a subelty different in the way it reduces costs which I’ll return to),
but in the long run they can—all costs are variable in the long run. So, if there is an increase
in demand of good A, and production of good A is characterised by constant- or increasing-returns
to scale or economies of scale (these concepts are different with the same result, one referring
to a fixed proportion of inputs and the other to varying proportion of inputs) over time we end up with an increase in
quantity produced of A and a decrease in the price of A. But there need not be a downward sloping supply curve.
In the case of constant- or increasing-returns to scale you just make more A because more A is demanded. In the case of
economies of scale you just select from an envelop of possible short run average cost curves along the long run
cost curve that meets the quantity demanded and maximises profit.
A decreasing cost industry is something different. Let’s say industry (multiple firms) i produces good z. In
producing z they use inputs c,d and e. Industry i is categorised by economies of scale and experiences an unexpected
increase in demand for good z. Over time they ramp up with new factories and grew to a medium size industry. Their
input e is a non-commodity input which, because they are now a large bulk purchaser of e they buy at a discount. All other
inputs costs remain the same in real terms. The result is a lower average cost of production and downward
sloping industry supply curve. They may in fact be gaining from increasing returns to scale from producers of input e.
Car manufacturing is one example.
From #2
The typical explanation for why some industries are decreasing cost industries… The fixed costs of setting up a factory that can produce a million hard drives a year is less than 1000 times the fixed cost of setting up a factory that can produce a thousand hard drives a year.
This again is economies of scale and not decreasing cost industry. Also, it’s just one form, not even an industry.
To clarify what i wrote above a little, just because a firm experiences decreasing costs it does not
make it a decreasing-cost-industry in the way that this special case is treated in microeconomic theory.
I am thinking of questions like: “What happens if demand is high in one year, and then falls?
Will prices go back up?” It is true that some forms of investment in infrastructure are durable,
and therefore, once the infrastructure has already been built in anticipation of high demand,
costs will continue to stay low even if demand falls back. However, much of the long-term
infrastructure can be repurposed causing prices to go back up.
Your meaning is not clear to me here. A lot infrastructure is durable. By “costs will continue to stay low
even if demand falls back” do you mean even if demand increases once again? It will definitely stay
low if demand falls, but it’s not clear that that is your meaning. Why would prices go back up if the
infrastructure has been re-purposed to some other market? Do you mean that because demand has decreased some
firms will exit that market by re-purposing their gear and so those that remain will constitute a smaller
market supply (supply curve shift) and therefore a new higher equilibrium price will emerge? I wouldn’t call
the airline route change a re-purpose but simply selling to a different consumer in the same market. The hard-drive
to chip flash memory chips I would be more inclined to call re-purposing, but that’s related to economies of scope
and they’d probably be doing it already. There is already a huge body of theory on this stuff so maybe instead of
using terms like ‘time-directionality’ and ‘efficiency of scale’ you could revist the theory and explain your hypothesis in
very standard terminology?
Technology, particularly the knowledge component thereof, is probably an exception of sorts.
I’m far from convinced of this, if by technology you mean modern cutting edge computation tech for example.
ALL goods ARE technology. From programming languages to aircraft to condoms
to corkscrews. Knowledge, for a very long time, has been easy to reproduce. The fixed costs of produces a dread-tree-book
is huge but the marginal cost of another one, once it is written and typeset and at first printed, is tiny in comparison.
Consider a decreasing cost industry where a large part of the efficiency of scale is because larger
demand volumes justify bigger investments in research and development that lower production costs
permanently (regardless of actual future demand volumes). Once the “genie is out of the bottle”
with respect to the new technologies, the lower costs will remain — even in the face of flagging
demand. However, flagging demand might stall further technological progress.
Again, this is simply how it goes and always has for almost all products that at any stage had any value. Where demand flags
think of it as re-purposing knowledge.
Thus, people who have been in the business for ten years enjoy a better price-performance tradeoff than
people who have been in the business for only three years, even if they’ve been producing the same amount
per year.
This is often referred to as the learning curve in microeconomics. Think about a firm who’s production of a good
is characterised by increasing returns to scale. Their average cost will decrease as they increase production.
Over that same period they get better and faster—removing bottlenecks of various
kinds through optimisation of their processes because they become more intimate with their production problems via
experience and find ever more partial solutions. Whilst the decrease in average cost due to economies of scale
is along the long run average cost curve, the decrease in average cost due to this learning is a shift in the
long run average cost curve. This is also routine as one would imagine and a good example is a potato chip factory.
The “genie out of the bottle” character of technological progress leads to some interesting possibilities.
If suppliers think that future demand will be high, then they’ll invest in research and development that
lowers the long-run cost of production, and those lower costs will stick permanently, even if future
demand turns out to be not too high.
Well, they might invest in r&d. If they can take adavatge to increasing returns to scale in meeting demand they’d likely
just build more whatevers.
Assuming you like the resulting price reductions, this could be interpreted as an argument in
favor of bubbles, at least if you ignore the long-term damage that these might impose on people’s
confidence to invest.
Interesting, but I think the damage to willingness to invest would be too dear a loss and wouldn’t assume it away.
Don’t know how much extra was gained through the tech bubble in terms of tech we wouldn’t otherwise have had.
The bublle was in speculative financial market investment and not necessarily in in real economy actual stuff. I’ll grant
there is probably some crossover. Still, if people see real value in production they will demand those goods. Did we
get some gains in housing tech that we wouldn’t otherwise have had because of the housing bubble?
The crucial ingredient needed for technological progress is that demand from a segment with just
the right level of purchasing power should be sufficiently high. A small population that’s willing
to pay exorbitant amounts won’t spur investments in cost-cutting:
Won’t it? I think it will. Lower costs → higher accounting profits.
In a sense, the market segments willing to pay more are “freeriding” off the others — they don’t care enough to
strike a tough bargain, but they benefit from the lower prices resulting from the others who do
I don’t follow this. Given that they are early-adopters, only other early adopters are present in the market at
that point in time. How can they be freeriding off consumers who are willing to strike a tough bargain, as you say,
if those bargain strikers are not present in the market by definition? You mean they benefit later when the later adopters enter?
presumably the ealry adopters are at that time moved on to something newer and better.
Note, however, that if the willingness to pay for the new population was dramatically lower than that
for the earlier one, there would be too large a gap to bridge.
This need not be the case especially in the face of further tech improvements in production or dramatically
lower costs of factors of production, even for exogenous reasons.
In particular, the vision of the Singularity is very impressive, but simply having that kind of end in mind 30 years down the
line isn’t sufficient for commercial investment in the technological progress that would be necessary.
The intermediate goals must be enticing enough.
True enough it seems. And this is they way of things. The prospect of offering
transcontinental flight to a european forager millenia ago would have been absurd. A hangliding tour, maybe not so much.
From #5
I can broadly support the segments you’ve categorised. But I disagree with the notion that
“Progress in all three areas is somewhat related but not too much. In particular, the middle
is the part that has seen the most progress over the last decade or so, perhaps because demand
in this sector is most robust and price-sensitive, or because the challenges there are the ones
that are easiest to tackle.”
What do you mean by progress? Does progress mean more stuff being made in that segment, as in, able to
produce more of it? Production technology or the technology product itself? In either case I think the are
inextricably linked from the top down.
From #6 and 7
When I first began using computers they were 16k. I was 7. I take your point about the lack of urgency for average PC users to have
a great deal more ROM or RAM. But we use computers to do tasks not for their own sake and I take your point about complementary tasks.
Where I disagree is “On either end, therefore, the incentives for innovation seem low”. If the tools are there, people will find ever
more awesome ways of using them, and that is the history of tech progress!
Keep at it. Happy to go into more detail if it might be useful. I’ve been thinking a lot lately about the order of realisation of various
‘singularity’ techs and why it matters. Anyone interested? If so I’ll post up my thoughts.
What do you mean by progress? Does progress mean more stuff being made in that segment, as in, able to produce more of it? Production technology or the technology product itself? In either case I think the are inextricably linked from the top down.
I meant technological progress that improves the price-performance tradeoff. I measure it by “what sort of prices do I see when I go to Amazon and search for USB flash drives?”
Where I disagree is “On either end, therefore, the incentives for innovation seem low”. If the tools are there, people will find ever more awesome ways of using them, and that is the history of tech progress!
I do agree that if the tools are there and people get them (essentially) for free they’ll find ways to use it. If the tools are there but at exorbitant prices, they won’t. This gets back to the question of whether it’s easy enough to improve the price-performance tradeoff sufficiently dramatically to get to the threshold where people are willing to pay for it. The existence of early adopters and intermediate populations can help bridge the chasm.
Well, they might invest in r&d. If they can take advantage to increasing returns to scale in meeting demand they’d likely just build more whatevers.
This is true, and relates to the points i made later about the nature of demand and production structure mattering.
Won’t it? I think it will. Lower costs → higher accounting profits.
See the PS where I go into this in more detail.
I don’t follow this. Given that they are early-adopters, only other early adopters are present in the market at that point in time. How can they be freeriding off consumers who are willing to strike a tough bargain, as you say, if those bargain strikers are not present in the market by definition? You mean they benefit later when the later adopters enter? presumably the early adopters are at that time moved on to something newer and better.
Perhaps my language wasn’t clear. Obviously, they’re not freeriding at the point in time when the market is young. But by the time the market gets large enough and costs drop, they are effectively freeriding.
For instance, I would probably pay something like $50/month for Facebook, but I get it for free because Facebook knows that most of its users wouldn’t be willing to pay for their service, so they offer it for free. So I save $50/month, freeriding on the stinginess of other users.
You may argue that the early adopters paid their dues by buying the technology early on. But there could be a bunch of young people who “would have been early adopters” if they’d been around in the technology’s infancy but they weren’t around.
This need not be the case especially in the face of further tech improvements in production or dramatically lower costs of factors of production, even for exogenous reasons.
Yes, that is correct, it need not be the case. At the same time, I think it’s a consideration.
Thanks for your very detailed and carefully explained thoughts! I’m a bit busy with other things right now. I’ll respond to your points in a day or two, after I get the opportunity to double-check some of the points you raised.
This is often referred to as the learning curve in microeconomics.
I already mentioned (and linked to) the term “experience curve effects” which is synonymous. I didn’t claim this is unique to any specific industries, just that it was somewhat related to the point about the time-directionality of technology. I had written:
This sort of time-directionality is closely related to (though not the same as) the idea of experience curve effects: instead of looking at the quantity demanded or supplied per unit time in a given time period, it’s more important to consider the cumulative quantity produced and sold, and the economies of scale arise with respect to this cumulative quantity.
You write:
Whilst the decrease in average cost due to economies of scale is along the long run average cost curve, the decrease in average cost due to this learning is a shift in the long run average cost curve. This is also routine as one would imagine and a good example is a potato chip factory.
I’m far from convinced of this, if by technology you mean modern cutting edge computation tech for example. ALL goods ARE technology. From programming languages to aircraft to condoms to corkscrews. Knowledge, for a very long time, has been easy to reproduce. The fixed costs of produces a dread-tree-book is huge but the marginal cost of another one, once it is written and typeset and at first printed, is tiny in comparison.
I agree that knowledge relevant to production is technology. But still, the fraction of a product’s cost that’s attributable to technology can vary widely. And the fraction that’s attributable to new technology at the margin can vary even more widely.
For instance, printing presses for books are technology, but they’re not technology at the margin. The technology has already been invented. When you set up a printing press based on old, pre-existing technology, you are investing in capital and labor, not in technology (except insofar as your buying the equipment played an incentivizing role retrospectively for the people who came up with the relevant printing press technology).
The ratios also matter. If we’re shipping physical books, then the marginal cost is over a dollar. If we’re letting people download e-books, the marginal cost is under a cent. If we think of the content of the book as the “technology” (insofar as it contains ideas) then the ratio of technology fixed cost (the cost of writing the book) to the costs of selling/distributing the book is a lot higher in the e-book case because the cost of selling/distributing is lower.
I’ll reply to your points one by one, and link to these replies from the main post.
On your point about short and long run and fixed versus variable costs.
As you point out, in the short run, producers cannot immediately alter their fixed cost inputs e.g. new factories (r&d is a subelty different in the way it reduces costs which I’ll return to), but in the long run they can—all costs are variable in the long run. So, if there is an increase in demand of good A, and production of good A is characterised by constant- or increasing-returns to scale or economies of scale (these concepts are different with the same result, one referring to a fixed proportion of inputs and the other to varying proportion of inputs) over time we end up with an increase in quantity produced of A and a decrease in the price of A. But there need not be a downward sloping supply curve. In the case of constant- or increasing-returns to scale you just make more A because more A is demanded. In the case of economies of scale you just select from an envelop of possible short run average cost curves along the long run cost curve that meets the quantity demanded and maximises profit.
Thanks for that observation. I now realize that I wasn’t clearly distinguishing between two related but distinct ideas:
Even in the short run, a huge proportion of fixed costs means that the average cost per widget can go down as production increases for wide variation in the initial quantity of production. This could happen even though the marginal cost goes up, because the fixed costs still explain the bulk of production cost. The short-run supply curve could still be upward-sloping, but the short-run average total cost curve would be downward-sloping for quite a while (this is the average versus marginal distinction).
The long-run supply curve is selected as an envelope of short-run supply curves, where different short-run supply curves consider different production scenarios. The reason why we can consider multiple short-run supply curves is that we have freedom to vary the “fixed” costs. Whether the long-run supply curve is upward-sloping or downward-sloping will depend on whether things become cheaper per unit when we spend more.
I do see now that the ideas are conceptually distinct. They are related in the following very trivial sense: if fixed costs contributed nothing at all to production, then the short run and long run behavior wouldn’t differ. If, however, fixed costs do contribute something, then while we can say that the long-run supply curve is not as upward-sloping as the short-run supply curve, we can’t categorically say that it will be downward-sloping. It could be that to double the production, the best strategy is to double fixed and variable costs, so that the long-run supply curve would just be flat (regardless of whether fixed or variable costs dominate).
I guess what I was additionally (implicitly) assuming is not just that the fixed costs dominate production, but that the fixed costs themselves are subject to economies of scale. In other words, I was thinking both that “the cost of setting up the factory to manufacture widgets dominates the cost of labor” and that “the cost of setting up the factory scales sublinearly with the number of widgets produced.” If both assumptions are true, we should see downward-sloping long-run supply curves. In the real-world scenarios I had in mind, this is approximately true. But there are many others where it’s not.
Thanks for pointing this out!
PS: My intuition was coming from the observation that the more dominant a role fixed costs play in the production process at the margin , the larger the divergence between the short-run and long-run supply curves. But of course, fixed costs could be a huge share of the production process money-wise and yet not play a dominant role at the margin (i.e., when comparing different short-run supply curves). And further, even if the long-run supply curve is much less upward-sloping than the short-run supply curve, that still doesn’t make it downward-sloping.
Hi,
First contribution here but I’ve been lurking since the move from Overcoming Bias. Play nice :) I think this is an important subject matter which few people are giving attention to so I thought I’d offer some comments that might assist.
My comment was deemed too long so I’ve Split it up. If that’s bad form let me know. Considered removing quotations of the OP but it would make it too difficult to read.
If you are going to use pieces of standard microeconomics in future versions of this analysis it might be best to spend a bit more time defining them more clearly and explaining how they map to the subject. If there is any confusion in the assumptions contained in the theory it carries through to the analysis of the case in question. It may well all be clear in your mind but it doesn’t seem, at least to me, to unfold clearly in the text. But it might just be me...
Some examples From #1
As you point out, in the short run, producers cannot immediately alter their fixed cost inputs e.g. new factories (r&d is a subelty different in the way it reduces costs which I’ll return to), but in the long run they can—all costs are variable in the long run. So, if there is an increase in demand of good A, and production of good A is characterised by constant- or increasing-returns to scale or economies of scale (these concepts are different with the same result, one referring to a fixed proportion of inputs and the other to varying proportion of inputs) over time we end up with an increase in quantity produced of A and a decrease in the price of A. But there need not be a downward sloping supply curve. In the case of constant- or increasing-returns to scale you just make more A because more A is demanded. In the case of economies of scale you just select from an envelop of possible short run average cost curves along the long run cost curve that meets the quantity demanded and maximises profit.
A decreasing cost industry is something different. Let’s say industry (multiple firms) i produces good z. In producing z they use inputs c,d and e. Industry i is categorised by economies of scale and experiences an unexpected increase in demand for good z. Over time they ramp up with new factories and grew to a medium size industry. Their input e is a non-commodity input which, because they are now a large bulk purchaser of e they buy at a discount. All other inputs costs remain the same in real terms. The result is a lower average cost of production and downward sloping industry supply curve. They may in fact be gaining from increasing returns to scale from producers of input e. Car manufacturing is one example.
From #2
This again is economies of scale and not decreasing cost industry. Also, it’s just one form, not even an industry. To clarify what i wrote above a little, just because a firm experiences decreasing costs it does not make it a decreasing-cost-industry in the way that this special case is treated in microeconomic theory.
Your meaning is not clear to me here. A lot infrastructure is durable. By “costs will continue to stay low even if demand falls back” do you mean even if demand increases once again? It will definitely stay low if demand falls, but it’s not clear that that is your meaning. Why would prices go back up if the infrastructure has been re-purposed to some other market? Do you mean that because demand has decreased some firms will exit that market by re-purposing their gear and so those that remain will constitute a smaller market supply (supply curve shift) and therefore a new higher equilibrium price will emerge? I wouldn’t call the airline route change a re-purpose but simply selling to a different consumer in the same market. The hard-drive to chip flash memory chips I would be more inclined to call re-purposing, but that’s related to economies of scope and they’d probably be doing it already. There is already a huge body of theory on this stuff so maybe instead of using terms like ‘time-directionality’ and ‘efficiency of scale’ you could revist the theory and explain your hypothesis in very standard terminology?
I’m far from convinced of this, if by technology you mean modern cutting edge computation tech for example. ALL goods ARE technology. From programming languages to aircraft to condoms to corkscrews. Knowledge, for a very long time, has been easy to reproduce. The fixed costs of produces a dread-tree-book is huge but the marginal cost of another one, once it is written and typeset and at first printed, is tiny in comparison.
Again, this is simply how it goes and always has for almost all products that at any stage had any value. Where demand flags think of it as re-purposing knowledge.
This is often referred to as the learning curve in microeconomics. Think about a firm who’s production of a good is characterised by increasing returns to scale. Their average cost will decrease as they increase production. Over that same period they get better and faster—removing bottlenecks of various kinds through optimisation of their processes because they become more intimate with their production problems via experience and find ever more partial solutions. Whilst the decrease in average cost due to economies of scale is along the long run average cost curve, the decrease in average cost due to this learning is a shift in the long run average cost curve. This is also routine as one would imagine and a good example is a potato chip factory.
Part 2
From #3
Well, they might invest in r&d. If they can take adavatge to increasing returns to scale in meeting demand they’d likely just build more whatevers.
Interesting, but I think the damage to willingness to invest would be too dear a loss and wouldn’t assume it away. Don’t know how much extra was gained through the tech bubble in terms of tech we wouldn’t otherwise have had. The bublle was in speculative financial market investment and not necessarily in in real economy actual stuff. I’ll grant there is probably some crossover. Still, if people see real value in production they will demand those goods. Did we get some gains in housing tech that we wouldn’t otherwise have had because of the housing bubble?
Won’t it? I think it will. Lower costs → higher accounting profits.
I don’t follow this. Given that they are early-adopters, only other early adopters are present in the market at that point in time. How can they be freeriding off consumers who are willing to strike a tough bargain, as you say, if those bargain strikers are not present in the market by definition? You mean they benefit later when the later adopters enter? presumably the ealry adopters are at that time moved on to something newer and better.
This need not be the case especially in the face of further tech improvements in production or dramatically lower costs of factors of production, even for exogenous reasons.
True enough it seems. And this is they way of things. The prospect of offering transcontinental flight to a european forager millenia ago would have been absurd. A hangliding tour, maybe not so much.
From #5
I can broadly support the segments you’ve categorised. But I disagree with the notion that “Progress in all three areas is somewhat related but not too much. In particular, the middle is the part that has seen the most progress over the last decade or so, perhaps because demand in this sector is most robust and price-sensitive, or because the challenges there are the ones that are easiest to tackle.”
What do you mean by progress? Does progress mean more stuff being made in that segment, as in, able to produce more of it? Production technology or the technology product itself? In either case I think the are inextricably linked from the top down.
From #6 and 7
When I first began using computers they were 16k. I was 7. I take your point about the lack of urgency for average PC users to have a great deal more ROM or RAM. But we use computers to do tasks not for their own sake and I take your point about complementary tasks. Where I disagree is “On either end, therefore, the incentives for innovation seem low”. If the tools are there, people will find ever more awesome ways of using them, and that is the history of tech progress!
Keep at it. Happy to go into more detail if it might be useful. I’ve been thinking a lot lately about the order of realisation of various ‘singularity’ techs and why it matters. Anyone interested? If so I’ll post up my thoughts.
I meant technological progress that improves the price-performance tradeoff. I measure it by “what sort of prices do I see when I go to Amazon and search for USB flash drives?”
I do agree that if the tools are there and people get them (essentially) for free they’ll find ways to use it. If the tools are there but at exorbitant prices, they won’t. This gets back to the question of whether it’s easy enough to improve the price-performance tradeoff sufficiently dramatically to get to the threshold where people are willing to pay for it. The existence of early adopters and intermediate populations can help bridge the chasm.
Thanks once again for your comments!
This is true, and relates to the points i made later about the nature of demand and production structure mattering.
See the PS where I go into this in more detail.
Perhaps my language wasn’t clear. Obviously, they’re not freeriding at the point in time when the market is young. But by the time the market gets large enough and costs drop, they are effectively freeriding.
For instance, I would probably pay something like $50/month for Facebook, but I get it for free because Facebook knows that most of its users wouldn’t be willing to pay for their service, so they offer it for free. So I save $50/month, freeriding on the stinginess of other users.
You may argue that the early adopters paid their dues by buying the technology early on. But there could be a bunch of young people who “would have been early adopters” if they’d been around in the technology’s infancy but they weren’t around.
Yes, that is correct, it need not be the case. At the same time, I think it’s a consideration.
More in my next reply comment.
Also, my other posts may interest you. I look forward to your comments on those as well :).
Thanks for your very detailed and carefully explained thoughts! I’m a bit busy with other things right now. I’ll respond to your points in a day or two, after I get the opportunity to double-check some of the points you raised.
I already mentioned (and linked to) the term “experience curve effects” which is synonymous. I didn’t claim this is unique to any specific industries, just that it was somewhat related to the point about the time-directionality of technology. I had written:
You write:
Yes, I agree.
I agree that knowledge relevant to production is technology. But still, the fraction of a product’s cost that’s attributable to technology can vary widely. And the fraction that’s attributable to new technology at the margin can vary even more widely.
For instance, printing presses for books are technology, but they’re not technology at the margin. The technology has already been invented. When you set up a printing press based on old, pre-existing technology, you are investing in capital and labor, not in technology (except insofar as your buying the equipment played an incentivizing role retrospectively for the people who came up with the relevant printing press technology).
The ratios also matter. If we’re shipping physical books, then the marginal cost is over a dollar. If we’re letting people download e-books, the marginal cost is under a cent. If we think of the content of the book as the “technology” (insofar as it contains ideas) then the ratio of technology fixed cost (the cost of writing the book) to the costs of selling/distributing the book is a lot higher in the e-book case because the cost of selling/distributing is lower.
I’ll reply to your points one by one, and link to these replies from the main post.
On your point about short and long run and fixed versus variable costs.
Thanks for that observation. I now realize that I wasn’t clearly distinguishing between two related but distinct ideas:
Even in the short run, a huge proportion of fixed costs means that the average cost per widget can go down as production increases for wide variation in the initial quantity of production. This could happen even though the marginal cost goes up, because the fixed costs still explain the bulk of production cost. The short-run supply curve could still be upward-sloping, but the short-run average total cost curve would be downward-sloping for quite a while (this is the average versus marginal distinction).
The long-run supply curve is selected as an envelope of short-run supply curves, where different short-run supply curves consider different production scenarios. The reason why we can consider multiple short-run supply curves is that we have freedom to vary the “fixed” costs. Whether the long-run supply curve is upward-sloping or downward-sloping will depend on whether things become cheaper per unit when we spend more.
I do see now that the ideas are conceptually distinct. They are related in the following very trivial sense: if fixed costs contributed nothing at all to production, then the short run and long run behavior wouldn’t differ. If, however, fixed costs do contribute something, then while we can say that the long-run supply curve is not as upward-sloping as the short-run supply curve, we can’t categorically say that it will be downward-sloping. It could be that to double the production, the best strategy is to double fixed and variable costs, so that the long-run supply curve would just be flat (regardless of whether fixed or variable costs dominate).
I guess what I was additionally (implicitly) assuming is not just that the fixed costs dominate production, but that the fixed costs themselves are subject to economies of scale. In other words, I was thinking both that “the cost of setting up the factory to manufacture widgets dominates the cost of labor” and that “the cost of setting up the factory scales sublinearly with the number of widgets produced.” If both assumptions are true, we should see downward-sloping long-run supply curves. In the real-world scenarios I had in mind, this is approximately true. But there are many others where it’s not.
Thanks for pointing this out!
PS: My intuition was coming from the observation that the more dominant a role fixed costs play in the production process at the margin , the larger the divergence between the short-run and long-run supply curves. But of course, fixed costs could be a huge share of the production process money-wise and yet not play a dominant role at the margin (i.e., when comparing different short-run supply curves). And further, even if the long-run supply curve is much less upward-sloping than the short-run supply curve, that still doesn’t make it downward-sloping.