Supply Curve of the Decreasing Cost Industry
It is conceivable that an industry might have decreasing costs due to net external economics. As a young industry grows in a new territory, it is likely that external economics may overweigh the external diseconomies so that, with the expansion of the industry, production costs would be reduced. The presence of net external economics will shift the cost curves of the firms (both existing as well as new ones) downward. TIle cost curves of a young industry with its expansion may be lowered (a) because cheaper and bel rcr trained labour becomes available. (b) because better information seizures and markets created, (c) because productivity of the factors in one finn is enhanced by expanded production in others or (d) because raw materials produced at decreasing costs by other specialised industries arc obtained cheaply. Owing to the external economics. the additional supplies of the product will be forthcoming at reduced prices. Every firm after expansion will he in equilibrium where it is equating price with marginal cost and minimum average cost. But this new price and minimum average cost will be lower than the original ones,depicts the position of one firm but all finm arc supposed to have identical conditions. At the initial price OP, before expansion of the industry, even finn will be in equilibrium at E and will be producing OM. The total supply of the product by the industry at price As the new firms enter, in the long run under the stimulus of increased demand, additional supplies of the product will be coming at the lower price OP, ‘ since costs would be reduced with the expansion of the industry. The new dotted LAC and LMC curves are long-run average and marginal cost curves respectively after the industry has expanded due to the entry of new finns. In this new position, every linn will be in long-run equilibrium equating price OP, with ne marginal and minimum average cost at E, and producing upwards or sloping downwards depending upon the fact whether the industry is a constant cost. an increasing cost or a decreasing cost industry. But as mentioned above, the long-run upward sloping supply curve is more in conformity with the actual world, incc external economies are very much limited in scope in the real world.
The productive resources are required in all lines of production and increased demand for them by any industry is bound to push their prices up. OM,. The total supply of the product by the industry will be ON .The total supply will be-greater at the new price OP, than at the old price OP partly because of the larger production by the existing firms but mainly because there will be a greater number of firms at OP.