8.12 : Long-run Supply Curve in Increasing and Decreasing Cost Industries

In perfect competition, the long run supply curves are not always flat.

Firstly, consider an increasing cost industry, where the price of input resources, such as labor or raw materials, increases as output increases. Here, the long run supply curve slopes upward.

For example, suppose corn cultivation is an industry with input resource prices that increase as more corn is produced. Growing corn can become more expensive per bushel produced due to increased prices for input resources arising from limited land availability and rising prices for seed and fertilizer. This raises the total cost of production, forcing producers to raise selling prices. This results in an upward-sloping long-run supply curve.

Now, consider a decreasing cost industry, where the price of input resources decreases as output increases.

For example, take the computer chip manufacturing industry. As output increases, firms benefit from economies of scale and technological advances.

Producing at higher volumes allows for better deals on materials and efficient production methods, reducing costs. This leads to a lower selling price, resulting in a downward-sloping long run supply curve.