Constant-, Increasing-, and Decreasing-Cost Industries
In this lesson on Constant-, Increasing- and Decreasing-Cost Industries, you will learn the
following concepts:

*What is meant by a constant-cost industry?
*What are examples of a constant-cost industry?
*What is meant by an increasing-cost industry?
*What are examples of an increasing-cost industry?
*What is meant by a decreasing-cost industry?
*What are examples of a decreasing-cost industry?
Constant-Cost Industry
As discussed in previous lessons on perfect competition, as demand increases in the
industry, the industry price and quantity go up, the firm price and quantity go up, and
the firm's profit goes up as shown in the graph below.

1.  What is meant by a constant-cost
industry?

A constant-cost industry is an industry
where input prices do not change as
industry output changes.  One reason
for this is the industry demand for the
input resources is such a small portion
of the total demand for those resources.

2.  What are examples of a constant-cost
industry?

Pencils--As more firms enter the
          industry, the increase in the  
          demand for wood to produce
          the pencils increases but the
          price of wood doesn't change
          because the production of
          wood pencils is such a small
          portion of the demand for wood.

Internet Storage Space--As the use of
          the Internet keeps expanding,  
          there is an increase in demand
          for storage space, but because
          there is an abundant amount of
          storage space to satisfy the
          entire market, the long-run
          supply curve is horizontal.
Increasing-Cost Industry
Decreasing-Cost Industry
In this lesson on Constant-, Increasing- and Decreasing-Cost Industries, you learned the following concepts:

*What is meant by a constant-cost industry?
*What are examples of a constant-cost industry?
*What is meant by an increasing-cost industry?
*What are examples of an increasing-cost industry?
*What is meant by a decreasing-cost industry?
*What are examples of a decreasing-cost industry?
Constant-Cost Industry (shown all at once)
Notice the individual firm graph to the
left includes both the short-run ATC
curve (ATCSR) and the long-run ATC
curve (
LRATC).  Remember from a
previous lesson that the long-run ATC
curve (
LRATC) is the envelope of all
the short-run ATC curves (ATCSR).

When you press the continue button,
you see as demand increases nothing
happens to the short-run average total
cost curve (ATCSR) orto the long-run
average total cost curve (
LRATC).
Increasing-Cost Industry (shown all at once)
Decreasing-Cost Industry (shown all at once)
Constant-Cost Industry (shown all at once)

The graph to the left is identical to the
graph you just looked at above on
constant-cost industry, except it shows
how the lines move simultaneously.  Click
the continue button to watch the lines
move all at once.
Increasing-Cost Industry (shown all at once)

The graph to the left is identical to the graph
you just looked at above on increasing-cost
industry, except it shows how the lines move
simultaneously.  Click the continue button to
watch the lines move all at once.
Decreasing-Cost Industry (shown all at once)

The graph to the left is identical to the graph
you just looked at above on decreasing-cost
industry, except it shows how the lines move
simultaneously.  Click the continue button to
watch the lines move all at once.

1.  What is meant by a increasing-cost
industry?

In an increasing-cost industry, entry of
new firms increases the prices of the
resources used to produce the product
(factors of production). As firms enter the
market, the demand for the factors of
production increases which drives up the
input costs of production as the industry
produces more units of output.

2.  What are examples of a
increasing-cost industry?

Mining Industry--As demand for
        commodities increases, firms  
        produce more output driving up
        the price of inputs to produce the
        product.  As firms produce more
        output, this increases the demand
        for machinery and skilled
        equipment operators. Government
        regulations on air and water
        quality add to the long-run costs
        (but provide a large benefit to the
        surrounding environment).

Electric/Hybrid Automobiles--As the
        purchase of electric or hybrid cars
        rises, there is an increase in the
        demand for the inputs that
        produce the cars.  As this
        happens there is an increase in
        demand for the battery, which
        requires rare earth elements such
        as lanthanum,neodymium, terbium
        and dysprosium.  This drives up
        the price of the input to produce
        the cars.

1.  What is meant by a decreasing-cost
industry?

In a decreasing-cost industry, firms could
have very large fixed costs which don't
increase with an increase in output, firms'
capital investment into technology could
begin to pay off, or firms' suppliers of inputs
could move closer to industry leader.  

2.  What are examples of a decreasing-cost
industry?

Ecommerce--There are high fixed costs such
       as software programing, Internet
       software/hardware protection, up-front
       creation of the material content, etc.  
       Each unit produced after that has a
       much lower marginal cost.

Solar-panel industry--There are high fixed
      costs in the development of producing
      efficient solar panels.   Each panel
      produced after that has a much lower
      marginal cost.
RB7:  Activity 2:  Perfect Competition Graphing Loss
Steven M. Reff
Economics Lecturer
University of Arizona
(2007 - 2016)
The 2015 University of Arizona
Five-Star Faculty Award
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Constant Cost Industries (3:23 minutes)
RB7:  Activity 3:  Perfect Competition (True/False)
RB7:  Activity 1:  Perfect Competition Graphing Profit
Steven M. Reff
Economics Lecturer
University of Arizona
(2007 - 2016)
The 2015 University of Arizona
Five-Star Faculty Award
Increasing Cost Industry (3:05 minutes)
Decreasing Cost Industry (3:59 minutes)
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RB7:  Activity 4:  Perfect Competition Case Problem
RB7:  Activity 6:  Perfect Competition Interactive Graph (Firm on Right)
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RB7:  Activity 5:  Perfect Competition Interactive Graph (Firm on Left)
17 Multiple Choice Questions on Perfect Competition
15 Multiple Choice Questions on Perfect Competition
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