Constant, Increasing, and Decreasing Cost Industries

In the long run, firms enter a competitive industry whenever price sits above minimum average total cost, and they exit whenever it sits below. Entry keeps happening until economic profit hits zero again, which pins down the long-run price. The question this topic asks is what happens to that price as the whole industry gets bigger. The answer depends on what expansion does to input prices. In a constant-cost industry, the industry can hire more labor, land, and materials without pushing their prices up, so the new zero-profit price equals the old one no matter how much output grows. That gives a horizontal long-run industry supply curve.

In an increasing-cost industry, growth is not so easy. The inputs the industry needs are specialized or limited, so as more firms enter and compete for them, wages and input prices get bid up. Every firm's cost curves shift upward, including minimum average total cost. Since price must equal the new, higher minimum average total cost for zero economic profit, the long-run price rises as quantity rises. Plotting these higher equilibrium prices against higher quantities traces an upward-sloping long-run industry supply curve, with slope equal to the change in price divided by the change in quantity. A decreasing-cost industry runs the logic in reverse: expansion lets input suppliers achieve economies of scale or lowers input costs some other way, cost curves shift down, and the long-run price falls as the industry grows, giving a downward-sloping curve.

This topic extends the zero-profit entry-and-exit logic from the perfectly competitive long-run model, showing that the simple horizontal supply curve is really a special case, not the rule.