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The long-run adjustment and industry types

Whenever there are expansions in an industry, costs of production for the existing and new firms could either stay the same, increase, or even decrease. Therefore, we can categorize an industry as being (1) a constant cost industry (as demand increases, the cost of production for firms stays the same), (2) an increasing cost industry (as demand increases, the cost of production for firms increases), or (3) a decreasing cost industry (as demand increases the costs of production for the firms decreases).

For a constant cost industry , whenever there is an increase in market demand and price, then the supply curve shifts to the right with new firms’ entry and stops at the point where the new long-run equilibrium intersects at the same market price as before. But why will costs remain the same? In this type of industry, the supply curve is very elastic. Firms can easily supply any quantity that consumers demand. In addition, there is a perfectly elastic supply of inputs—firms can easily increase their demand for employees, for example, with no increase to wages. Tying in to our Bring it Home discussion, an increased demand for ethanol in recent years has caused the demand for corn to increase. Consequently, many farmers switched from growing wheat to growing corn. Agricultural markets are generally good examples of constant cost industries.

For an increasing cost industry , as the market expands, the old and new firms experience increases in their costs of production, which makes the new zero-profit level intersect at a higher price than before. Here companies may have to deal with limited inputs, such as skilled labor. As the demand for these workers rise, wages rise and this increases the cost of production for all firms. The industry supply curve in this type of industry is more inelastic.

For a decreasing cost industry , as the market expands, the old and new firms experience lower costs of production, which makes the new zero-profit level intersect at a lower price than before. In this case, the industry and all the firms in it are experiencing falling average total costs. This can be due to an improvement in technology in the entire industry or an increase in the education of employees. High tech industries may be a good example of a decreasing cost market.

[link] (a) presents the case of an adjustment process in a constant cost industry. Whenever there are output expansions in this type of industry, the long-run outcome implies more output produced at exactly the same original price. Note that supply was able to increase to meet the increased demand. When we join the before and after long-run equilibriums, the resulting line is the long run supply (LRS) curve in perfectly competitive markets. In this case, it is a flat curve. [link] (b) and [link] (c) present the cases for an increasing cost and decreasing cost industry, respectively. For an increasing cost industry, the LRS is upward sloping, while for a decreasing cost industry, the LRS is downward sloping.

Adjustment process in a constant-cost industry

These three graphs show that the LRS is constant when costs do not increase or decrease, LRS slopes upward when costs are increasing, and LRS slopes downward when costs are decreasing.
In (a), demand increased and supply met it. Notice that the supply increase is equal to the demand increase. The result is that the equilibrium price stays the same as quantity sold increases. In (b), notice that sellers were not able to increase supply as much as demand. Some inputs were scarce, or wages were rising. The equilibrium price rises. In (c), sellers easily increased supply in response to the demand increase. Here, new technology or economies of scale caused the large increase in supply, resulting in declining equilibrium price.

Key concepts and summary

In the long run, firms will respond to profits through a process of entry, where existing firms expand output and new firms enter the market. Conversely, firms will react to losses in the long run through a process of exit, in which existing firms reduce output or cease production altogether. Through the process of entry in response to profits and exit in response to losses, the price level in a perfectly competitive market will move toward the zero-profit point, where the marginal cost curve crosses the AC curve, at the minimum of the average cost curve.

The long-run supply curve shows the long-run output supplied by firms in three different types of industries: constant cost, increasing cost, and decreasing cost.

Questions & Answers

How can capital market be better in the future
Hammed Reply
Capital market Capital market - The market of debt or equity securities
help provide equitable distribution of income if, lending policies are less stifle and also curb unemployment and poverty by promoting entrepreneurship
by advancing in technology, accumulation of machinery and other capital and better education and human capital all lead to increased economic growth and make the market better for the future.
pls wat is production possibility curve
Hasia Reply
economic is an art or science?
Karn Reply
is science
what is microeconomics and macroeconomics
Usman Reply
microeconomic deal with the study of individual firms and household and macroeconomics deal with the economy as a whole.
difine VAT,, and give advantage and disadvantage VAT
definition of Monopoly
malonzy Reply
Sir bsc ki economic ke ghraph ki book send karin
wat is meant by monopoly
monopoly is a process whereby one supplier and lot of damands in the market
this is where there is only one supplier in the market with many buyers
Monopoly is the type of market where only one person sells a commodity to many buyers,that is one seller with many buyers
Wat is the importance of economics
Vicky Reply
it broaden one's mind
it help us to make good choices
it helps to make efficient use of our scarce resources
helps in allocation of the scarce resources to many/myriad human wants
what is an efficient wage and how it causes structural unemployment and how it could be shown graphically?
Amos Reply
economics is a social science and an art discuss
Kerry Reply
further explanation on the definition
Samuel Reply
is demand the same as quantity demanded
literally, demand is not the same as quantity demanded. While quantity demanded is directly and particularly related to price, demand is the various relations that exist between quantity demanded and price of a commodity.
what is business economics
Nelson Reply
business economics is the way the society uses its limited resources to satisfy their unlimited wants
what is business economics
how did Mc connel defined economics
Isaac Reply
what is a economy planning?
Jacob Reply
what is demand
Sunday Reply
demand means desire for a commodity backed by willingness & ability to pay for that commodity
what is supply
supply means suppliers supplying more commodities when price's high or less when price's low to satisfy human want
the coefficient of price elasticity of supply is the measure of percentage change in the quantity supplied of a good due to a given percentage change in its price.
Please what is Economics of Scales?
what is cardinal and ordinal utility?
Cardinal utility is the satisfaction derived by the consumers from the consumption of goods and services while ordinal is ranked in terms of preference.
Please explain what is meant by Economic Integration?
Please I need help!!!!
economics scales I don't know but I know laws of returns to scale
can someone help explain to me what is fairly inelastic dd
Economics Economics - The study of how people use their limited resources to try to satisfy unlimited wants
Economic integration has been one of the main economic developments affecting international trade in the last years. Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to provide large markets for member-countries of the resulting integrate
Inelastic Demand When consumers are relatively unresponsive to price changes. A PED coefficient of less than one means that a particular change in the price of a good will be met by a proportionally smaller change in the quantity demanded.
demand refers to goods and services that a consumer is willing and able to buy at given rate over a given period of time
Demand  - The entire relationship between the quantity of product that buyers wish to purchase per period time and the price of that product..
what are the factor that affect demand
The factors that affect demand Price Price of the other commodity Wheather and climate conditions
what is development planning?
Emmanuel Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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