Chapter 17 — Further Reading

On cost theory

Alfred Marshall, Principles of Economics, 8th edition, 1920 Marshall developed the cost-curve framework this chapter uses. Book V covers the theory of production and cost in detail.

Hal Varian, Intermediate Microeconomics: A Modern Approach, W. W. Norton, multiple editions The standard intermediate textbook. Chapters 19–22 cover production, cost, and firm behavior with more mathematical rigor. Recommended if you want to go deeper.

Paul Milgrom and John Roberts, Economics, Organization and Management, Prentice Hall, 1992 A more advanced treatment of the economics of organizations, including why firms have the cost structures they do — not just what the curves look like but why they look that way.

On diminishing returns

Thomas Malthus, An Essay on the Principle of Population, 1798 The original application of diminishing returns to agriculture and population. Malthus argued that food production faces diminishing returns while population grows geometrically — leading to inevitable food shortages. He was wrong about the prediction (technology kept output growing) but right about the underlying principle.

David Ricardo, On the Principles of Political Economy and Taxation, 1817 Ricardo formalized diminishing returns in agriculture and used it as the basis for his theory of rent (the return to land as a fixed factor). Chapter 2 is the relevant section.

On economies of scale

Alfred Chandler, Scale and Scope: The Dynamics of Industrial Capitalism, Harvard University Press, 1990 A business history classic that documents how economies of scale shaped the modern industrial corporation. Chandler shows how the need for scale drove the development of the large corporation in the late 19th and early 20th centuries.

John Sutton, Sunk Costs and Market Structure, MIT Press, 1991 A more theoretical treatment of how fixed and sunk costs shape industry structure. Sutton shows that industries with high sunk costs tend toward concentrated market structures.

On airline cost structures (case study 2)

Rigas Doganis, Flying Off Course: Airline Economics and Marketing, Routledge, 5th edition, 2019 The standard textbook on airline economics. Covers cost structures, pricing, yield management, and the competitive dynamics of the airline industry.

Steven Morrison and Clifford Winston, The Evolution of the Airline Industry, Brookings Institution, 1995 A comprehensive account of how deregulation (the Airline Deregulation Act of 1978) transformed airline cost structures and pricing.

Conor Sen, "The Pandemic Exposed the Fragility of Airlines' Business Model," Bloomberg, 2020 A real-time commentary on how COVID exposed the high-fixed-cost vulnerability of airlines.

On sunk costs

Hal Arkes and Catherine Blumer, "The Psychology of Sunk Cost," Organizational Behavior and Human Decision Processes, 1985 The classic experimental paper on sunk-cost bias. Arkes and Blumer show that people systematically fail to ignore sunk costs in controlled experiments.

Richard Thaler, "Toward a Positive Theory of Consumer Choice," Journal of Economic Behavior & Organization, 1980 An early behavioral-economics paper that discusses sunk-cost effects and other departures from rational cost reasoning.

On food processing cost structures (case study 1)

USDA Economic Research Service, Food Dollar Series, ongoing The USDA tracks how the consumer's "food dollar" is divided among farming, processing, distribution, retail, and food service. Useful for understanding where cost pressures in the food supply chain come from.

Chris Edwards and Peter Van Doren, "Agricultural Subsidies," Cato Institute, 2020 A critical look at how farm subsidies affect the cost structure of food processing and retail. Useful background for the Riverside Foods example.

A reading order recommendation

If you have time for one of the sources above, read Varian's intermediate micro textbook (chapters on production and cost). It gives you the mathematical rigor behind the intuition this chapter developed.

If you want the business-history perspective on scale, read Chandler's Scale and Scope.

If you want to understand airline pricing, read Doganis's Flying Off Course.

Chapter 18 — Perfect Competition: The Benchmark Model — is next. It takes the cost curves from this chapter and shows what happens when many firms with identical costs compete in a market with free entry and exit. The key result: in long-run equilibrium, economic profit is zero.