[OPE-L:4009] RE: More Depreciation (Example)

Chai-on Lee (conlee@chonnam.chonnam.ac.kr)
Fri, 17 Jan 1997 05:15:11 -0800 (PST)

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May I intervene in the debate between John and Andrew... Chai-on.

>John: "For Andrew, the technological life and the economic life seem to the
>Andrew: Au contraire, mon frere. That was my point in giving two examples,
one >in which the machine was used for its full technological lifetime (3
years), >and one in which it was used only for 2 years.

Chai-on: In terms of economic life, the first machine initially priced at
$15,000 had only 2.5 years of duration, for its value was only worth $9,000
after 1 year [15,000*(1.5/2.5)=9,000]. Because the first capitalist's guess
was inaccurate, he had to suffer a loss of $1,000. The second machine
initially priced at $9,000 had only 2 years of economic duration because its
value was only worth $4,500 in the next period. If the first capitalist had
been to avoid a loss, he should have adjusted the economic duration every
period. He should have assumed the duration to be 2.5 years in the first
period, and then had to readjust it to another 2 years in the next period.
In summation, its duration is still 3 years. But the depreciation was not in
the form of a straight line. The STRAIGHT LINE method is not appropriate for
the avoidance of a loss. Yet, if we insist the straight line method, our
capitalists should have kept the initial assumption of 2.5 years duration.
As far as he insists the initial assumption of the 2.5 years duration, he
need not suffer any loss but rather can enjoy a gain. When other machines
are worth $4,500, his machine is already depreciated to $3,000. He can then
enjoy a better position in the competition with others. Is this called an
entry barrier?

In solidarity,

Chai-on Lee
Faculty of Economics,
Chonnam National University,
Kwang-Ju, 500-757,
S Korea
Tel: +82-62-520 7329
Fax: +82-62-529 0446
E-m: conlee@chonnam.chonnam.ac.kr