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The document discusses supply curves under different cost conditions: (1) Constant cost industries have a perfectly elastic horizontal supply curve, as input prices do not change with output. (2) Increasing cost industries have an upward-sloping supply curve, as higher output levels require paying more for scarce inputs. (3) Decreasing cost industries experience falling average costs as scale increases, so their downward-sloping supply curve reflects lower prices at higher output levels.

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Fatima Ali
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25 views

CC C C C CC C C CC

The document discusses supply curves under different cost conditions: (1) Constant cost industries have a perfectly elastic horizontal supply curve, as input prices do not change with output. (2) Increasing cost industries have an upward-sloping supply curve, as higher output levels require paying more for scarce inputs. (3) Decreasing cost industries experience falling average costs as scale increases, so their downward-sloping supply curve reflects lower prices at higher output levels.

Uploaded by

Fatima Ali
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Micro Economics Behavior of the Cost:

(1) If the industry is subject to constant cost, the shape of the supply curve will be perfectly elastic, i.e. it will be horizontal straight line parallel to the X-axis. (2) If the industry obeys the taw of increasing cost or diminishing return, the shape of the supply curve will be positive, i.e. it will rise from left to right. (3) If the industry is governed by the law of diminishing cost or increasing return, the long run supply curve will be negative, i.e., it will fall downward from left to right.

(1) Supply Curve of a Constant Cost Industry:


If the supply of factors of production is perfectly elastic i.e., they can be had in as much quantity as the firms desire without effecting the prevailing market price. The long run supply curve of the firms will be a horizontal straight tine parallel to the X-axis. For instance, if the paper doll industry expands its output, an increase in demand for paper will have no perceptible effect on the market price of the paper. It is because of the fact that its demand forms an insignificant portion of the total supply. So is also the case with labor in the paper doll industry. If all the firms making paper doll increase their demand for labor, it wilt have no impact on the labor market. In the constant cost industry, it has been assumed, that the price of inputs do not change as the size of industry varies. The minimum average total cost of the firm remains constant as is explained in the diagram below:

Diagram:

In figure (15.10a) the firm is in the long-run equilibrium at point N where:Price = MC = Minimum average cost. The firm produces output OP and sells at price OK per unit The firm like all other firms in the industry make normal profits. In figure (15.10b), it is shown that when the market demand for .a product increases, / the demand curve DD shifts upwards. The new firms enter the industry and each firm produces at

Micro Economics
minimum point of average cost which is OK. The industry is thus producing any quantity of output at a price of OK. The supply curve of the industry is perfectly elastic at a price OK in the long run.

2. Supply Curve Of The Increasing Cost Industry :


When the demand for a good increases in the long run, the new firms enter the industry and the existing firms expand their size for greater production. Due to appreciable increase in demand for the scare factors, their price go up.The unit cost of production of all the firms in the industry rises above the previous level. So is also the case with minimum average cost, which rises at higher level than before. The supply curve thus slants (oblique) upward from left to right or we say the slope of the curve is the long run diseconomies, then industry will subject to increasing cost or diminishing return.

Diagram:

In the figure (A) it is shown that when the demand for a commodity increases, more firms enter into the industry. In order to attract more units of the factors, the firms pay higher prices for them. The cost curves of the firms move up. The minimum average cost of the firm equals marginal cost equals price at point F. The firm in the long run is in equilibrium at point F and produces the best level of output OT. When the costs of the firms rise with the expansion of output, the supply 'curve of the industry Fig. (B) also slants upward. The industry is now in equilibrium at point R, with industry output OT and Price OK.

(3) Supply Curve of a Decreasing Cost Industry:


If the price of one or more than one input falls with the expansion of industry, the industry is said to be a decreasing cost industry. For instance, if in a particular industry, technological improvements in production take place and the long run economies outweigh the long run diseconomies, then industry will be subject to decreasing cost or increasing return. The MC, MR and minimum AC will shift downward from the original position. The entire long run supply curve will slant downward from left to right or it has negative slope. This is illustrated below with the help of the curves.

Diagram:

Micro Economics
In the Fig. (C) the firm is in equilibrium at point K in the long run because at point K, MR = MC = Price = Minimum AC. It will produce OT output at price ON. The total supply by all the firms (supply of industry) producing the commodity at price ON will be OH. If the demand for the product increases, the existing firms will expand their sizes and the new firms will enter the industry/Due to technological developments and the economies of large scale production, the MC, AC, and price fall. At the lower price OP, the firm is in equilibrium at point F. Here MC = AC = Price. The supply of a firm increases from OT to OH at a decreasing cost. The supply of the industry at lower price OP increases from OH to OK. The long run equilibrium supply curve slopes downward from left to right.

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