Question 1

Why does the long-run supply curve slope upward in an increasing cost industry?

Accepted Answer

In an increasing cost industry, input resource prices rise as output expands. For example, corn cultivation faces higher seed and fertilizer costs due to limited land availability. As production increases, demand for these resources grows, driving up their prices. Producers must raise selling prices to cover increased production costs, creating an upward-sloping long-run supply curve.

Question 2

What causes a downward-sloping long-run supply curve in a decreasing cost industry?

Accepted Answer

In a decreasing cost industry, input resource prices decline as output increases. The computer chip manufacturing industry exemplifies this: higher production volumes enable better material deals and efficient production methods. Technological advances and economies of scale reduce per-unit costs, allowing firms to lower selling prices while expanding supply, resulting in a downward-sloping long-run supply curve.

Question 3

How do economies of scale affect production costs in expanding industries?

Accepted Answer

Economies of scale reduce production costs as firms increase output volume. Larger production runs enable negotiated discounts on materials and implementation of efficient production methods. These cost reductions allow firms to maintain profitability at lower prices, particularly in decreasing cost industries where technological advances compound efficiency gains.

Question 4

Why are long-run supply curves not always horizontal in perfect competition?

Accepted Answer

Long-run supply curves are not always flat because input resource prices change as industry output changes. In increasing cost industries, resource prices rise with production, creating upward-sloping curves. In decreasing cost industries, resource prices fall with production, creating downward-sloping curves. This behavior reflects how industry expansion affects the cost structure faced by firms.

Question 5

What role does resource availability play in determining industry cost behavior?

Accepted Answer

Resource availability directly influences whether an industry experiences increasing or decreasing costs. Limited land availability for corn cultivation drives up input prices as production expands. Conversely, increased resource availability or technological improvements reduce costs as industries grow. These supply constraints or advantages determine whether the long-run supply curve slopes upward or downward.

Question 6

How does the price of input resources affect the final product price in perfect competition?

Accepted Answer

Input resource prices directly determine production costs, which firms pass through to consumers. In increasing cost industries, rising input prices force producers to raise product prices as output expands. In decreasing cost industries, falling input prices allow producers to lower product prices despite increased supply, demonstrating the direct relationship between resource costs and market prices.

Question 7

What is the difference between increasing and decreasing cost industries?

Accepted Answer

Increasing cost industries experience rising input resource prices as production expands, creating upward-sloping long-run supply curves and higher product prices. Decreasing cost industries experience falling input resource prices as production expands, creating downward-sloping long-run supply curves and lower product prices. This fundamental difference reflects how industry growth affects the underlying cost structure.

Long-run Supply Curve in Increasing and Decreasing Cost Industries

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