Principles of Microeconomics / Unit 7 MIC 0632 worked example, 60 to 90 seconds
Classifying the Industry and Its Long-Run Supply
The idea
To classify an industry, ask what entry does to the prices of its inputs. If nothing, it is constant-cost and long-run supply is horizontal at the original price. If entry bids input prices up, it is increasing-cost, average cost curves shift up as the industry grows, and long-run supply slopes upward. If entry lowers input prices, it is decreasing-cost and long-run supply slopes downward. Then state where the price settles after a demand increase: back where it was, higher, or lower.
In practice
Worked example: a demand increase hits three industries in long-run equilibrium at twenty-five dollars. Strawberry farming buys land and labor from large markets, so it is constant-cost and the price returns to twenty-five. Custom carpentry draws on a limited pool of skilled joiners whose wages rise as shops open, so it is increasing-cost and the price settles at twenty-eight. Solar panel assembly buys cells whose makers gain economies of scale as orders grow, so it is decreasing-cost and the price settles at twenty-two.
Where people slip
The classification is about input prices as the industry expands, not about any single firm's cost curve. And an upward-sloping long-run supply curve is still a zero-profit curve: the higher price after entry covers higher costs, not a profit.
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