Question

Explain the difference between and constant and increasing cost industry and how the shape of the long-run supply curve will be different for each. Which type of industry is more common?

What is the relationship between time and elasticity of supply? Why is it so?

In a price searcher market with low barriers, the price of a good will vary and often be higher than in a price taker market. Is this economically inefficient? Are there benefits associated with this market that make this a good outcome?

Answer 1

a.... In a constant cost industry the ratio comparing units produced to production cost per unit (AC) remains the same regardless of output volume or demand growth. Thus the long run supply curve in this industry will be constant (horizontal). On the other side , in an increasing cost industry the long run supply curve will be upward. Here when demand for the product increases, at higher prices new firms are prompt to join the industry to get the better margins. Increasing cost industry are more common because new firms are attracted at higher prices to enter the market.

b...... Time is either short run or long run. In short run firms can not change output much in response of change in price so elasticity of supply is inelastic. Whereas in the long run firms can adjust output with relation to price so supply becomes elastic in the long run.

c...

Price searcher firms are not economically efficient because their prices are higher and output are smaller than price taker firms. This is because they enjoy some price control over their product due to some barriers to entry of new firms. The major benefit with such firms are that they exercise control over price and output.