Long-Run Industry Supply
What is the shape of the long-run supply curve for an industry? Suppose that an industry has free entry of identical firms. If the identical firms use general inputs, such as unskilled labor. that can be attracted from the vast ocean of other uses without affecting the prices of those general inputs, we get the case of constant costs shown by the horizontal SLSL supply curve in Figure 8-6 on page 154. .
By contrast, suppose some of the inputs used in the industry are in relatively short supply-for example, fertile vineyard land for the wine industry or scarce beachfront properties for summer vacations. Then the supply curve for ‘the wine or vacation industry must be upward-sloping, as shown by SL SL in Figure 8-5 & 8-6,
Why must the long-run supply curve of industries using scarce factors be using? We must invoke the law of diminishing returns. For the case of the rare vineyard laird, when firms apply increasing inputs of labor to fixed land, they receive smaller and smaller increments of wine-grape output; but each dose of labor costs the same in wages, so the MC of wine rises. This long-run rising MC means that the long-run supply curve must be rising..
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