Long-run Supply Curve

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Long-run Supply Curve
As already men . long run is a period sufficiently long to allow in both the size as well as the number of fi i the industry. If then; is an increase in demand, in the short run, it will be met by over-utilisation of the existing plant. But if the increased demand persists in the long run. it will be met by both the expansion of the existing firms as well as by the entry of new firn in the industry. Long-run supply is defined as supplies offered at various prices by the exiling as well as the potential producers in the long-run. As explained before, a firm under perfect competition ill in long-run equilibrium when it is equalizing price with both marginal cost and average cost. The forces of competition (i.e., free entry or exit uf the firms) force the finn under perfect competition to produce at the minimum point of its average cost curve in the long-run equilibrium.

On a little reflection, it will be clear that the long-run supply curve of the perfectly competitive industry
can nut he the lateral summation of the long run marginal cost curves of the firms as in short-run supply curve. This is so because. in the long-run equilibrium, owing to the free entry or exit of the firms under perfect competition, firms are forced to produce only at the minimum point of the lung-run dvc ragc cost curve where the long-run marginal cost curve intersects it. It is also because the expansion of the industry i.e., increase in the number of firms, brings about shifts in the cost curves of the firms due to the emergence of external economies and diseconomies of production. Moreover, the number of firms in the long-run equilibrium varies at different prices. The concept of external economies and diseconomies is important in describing the shape of the long-run supply curve. External economics and diseconomies arc those economies and diseconomies which are realised by each member firms as a consequence of the expansion uf the whole industry. An expansion of the industry may lead tu the availability of new and cheaper raw materials, tools and machinery, and to the discovery and diffusion uf new and cheaper techniques of production.

Some raw materials and tools may be made available at reduced prices. This is so because, as the industry grows, subsidiary and correlated firms may spring up in the vicinity of the industry to provide it with raw materials and tools at the reduced prices. Further. as the industry expands trade journals may appear which help in discovering and spreading new technical knowledge. Moreover, with expansion of the industry, specialised firms may COME into existence which work up its ‘waste products’. The industry can then sell them at good price. Thus, the entry of firms enlarging the size of the industry may enable all firms to produce at lower costs. TIle large-scale firms reap internal economies. The large-scale industry brings to the firms constituting the industry external economies. The availability of internal economies will shift the marginal and average cost curves of the firms below the previous level. There is every possibility of external economics to be reaped when a young industry grows in a new territory. But it is extremely doubtful whether external economies CONtinue to accrue as a well-established good-sized industry experiences further growth. On the contrary, an expanding industry may experience external diseconomies. As more firms enter into the industry, competition among them may push up the prices of scarce raw materials, skilled labour and other scarce factors or inputs. Further, the additional factors of production, other than entrepreneur, coming into the industry may be less efficient than the previous unes. The emergence of the external diseconomies will shift the marginal and average cost curves above the previous level. Thus, whether a particular industry on expansion will experience the phenomenon of rising costs or falling costs or constant costs will depend u~n the combined result of external economics and diseconomies. TIle long-run supply curve of a perfectly competitive industry will, therefore, have different shapes depending upon the fact: i) whether the industry in question is a constant cost industry;

(ii) increasing cost industry; or
(iii) decreasing cost industry.
We shall now examine these cases.

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Long-run Supply Curve