Question

Definitions for constant-cost, increasing-cost, and decreasing-cost industries; slope of the long-run market supply curve for each type of industry; impact of an increase or decrease in consumer demand on the long-run price for each type of industry

Answer 1

Constant cost industry may be defined as an industry which cost remains constant as output increases. Increasing cost industry is the industry which cost increases with an increase in output. In decreasing cost industry,the cost decrease as the output increases.

For a constant cost industry,the supply curve is completely elastic (horizontal), because any change in the market demand will lead to an entry or an exit of firms until the price returns to the industry's lowest average total cost. A constant cost industry can only exist if there are abundant supplies of inputs. Simply we can say that, both the short run average total cost and equilibrium price remains constant as output increases. The price remains horizontal at any quantity.

For an increasing cost industry,the long run supply curves is upward sloping due to the increase in average total cost as new firms enter the market. This is because of limited quantities of inputs. So when the demand for commodities increases,the prices of inputs also increase. So a greater quantity will only be supplied if the market price for the commodity is higher.

For a decreasing cost industry,the long run supply curve is downward sloping. Because the price of inputs declines with the increasing quantity. This is usually happens when the inputs are supplied by the producer himselves. Due to the economies of scale, there is the decreasing cost industry.