Supply Curve of the Constant Cost Industry

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Supply Curve of the Constant Cost Industry
A constant cost industry will be one in which the external economics and diseconomies may cancel each
other so that the constituent firms of an enlar ed industry do not experience any hift in their co t curv An industry can also be a constant cost ind try if i expansion generates neither external ceo rru nor external diseconomies. Obviously. as the number of firms in the iudu try increase. there will be increased demand fur productive factors like raw materials, labour, capital etc., by the industry: and if the prices of these productive factors rise, as the industry expands, then the costs must rise. Hence. a constant cost industry therefore, must be one which makes little impact on the market for these producti ve resources. In other words. its demand for these productive factors must be a very small proportion of the total demand for these factors. It is only then that the increased demand for these factors. as result of the expansion of the industry, will not raise the prices of these factors.

The paper-doll industry might be a case in P(lIOt. This industry uses such a small proportion uf the total quantity of paper produced in a year that a large increase in its demand for paper as a result of its expansion would have no perceptible influence on the price of paper. Similarly The increased demand for labour in the paper-doll industry would have little effect of raising the wages of the labour generally. In the case of constant cost industry, which is shown in Pig. 26.2 (b), the long-run supply curve wiLL be a horizontal straight line at the level of minimum long-run average cost curve. Every firm will be in long-run equilibrium where Price = MC = AC, i.e., at the minimum point of the long-run average cost. In the long-run. new firms will enter the industry without raising or lowering the cost curves of the firms in the industry so that the industry would supply any amount of commodity at the price OP which is equal to minimum long-run average cost. TIlUs. we see that in case uf the constant cost indu try, the new firms, which will enter the industry in tbe long-run, will have identical cost conditions with the already existing ones; and all firms will produce at the linin m point of the average cost curve. TIle additi I u lie of the product will come primarily fr m the entry of new firms-having the same minimum avera c t that any amount can be supplied at the price equal tu the minimum average cost by he increase III the number of firms,  LSC is the long-run supply curve of the constant cost inJ II) and in Pig. 26.2 (a), LAC and LMC arc the long-run a erage and marginal cost curves respectively. TIlC long-run marginal cost curve of the-firms in its relevant Portion slopes upwards but the long-run supply curve is horizontal straight line (i.e., perfectly clastic) at price OP, which is equal to the minimum average cost. Thus, it wiII be dear that the long-run supply curve is not the lateral summation of the long-run marginal cost curves.

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Supply Curve of the Constant Cost Industry