Long-run Normal Price in Decreasing Cost
As already pointed out in the preceding chapter, in the case or ;1 young industry in its early stages of growth, the external economics may overweigh the external diseconomies, This phenomenon of net external economics lowers the Cost curves Ill’ all firms. The external economics, which may be available when the industry grows ill size. arise because : (II) cheaper ledbetter trained labour becomes available: <b> better information ccrcs markets ale created; Ir) productivity of racl in one Iiu is enhanced h. c pan dcd production in others: (Ii) raw material rf\ld iced at decreasing costs other spccu lizcd ind ri .Irl’ made available at reduced prices: (e) cheap unn omcs available; and (j) there is the benefit of I x .leU lr.Jn XII 1. The pro: • net external economics wi II lower the co t L t firms and, therefore. the industry Will c I I momonon of decreasing costs a. it e ry of new firms. Thus. t5rhe ng-cost industry, the additional. UPI’ Ie ‘1 will he forthcoming at reduced L • the long-run supply curve of the INduS 1rv USq lkn distribution of normal price in the case of a decreasing cost industry can be explained with the help of Fig. 27.9 where LRS is the long-run supply curve of the decreasing-cost industry. To begin with. DD is the demand curve which intersects the market period supply curve MI’S at price 01’. Therefore. 01′ is the market price. Now suppose that there is a sudden and permanent change in demand from Of. As a result of this increased demand. the market price will rise sharply to Of”, output remaining the same.
In the short-run, the firms will increase output and. therefore, amount supplied will increase. As a result, the price ill the short-run will fall to at which the new dcnu d curve D’O’ intersects the short run supply curve SRS. In the long-run. however, new firms will enter the industry and cause a downward shin in the co I curves (.1′ all the Iinus. The new price determined at the level 01″” at which new demand curve cuts the downward Yuping lng supply curve t.RS. In this long-run equilibrium, IN” will he produced and supplied at a lower 1’1in’ th.u the original equilibrium position. Whcrc» in the nal equilibrium position, OM amount of the pH is produced and supplied at price Of’. in the position. a larger amount ( I” ducked and supplied at a lower price Ol long-run, larger supply: of the product I cAlling al reduced pncc COll ll. I’rom the above discussion, it is clear that, as demand increases. the long-run normal price increases. remains the same, or decreases depending on whether thc industry in question is an increasing cost, constant-cost or decreasing-cost industry.