WHY THE LONG-RUN SUPPLY CURVE MIGHT SLOPE UPWARD

So far, we have seen that entry and exit can cause the long-run market supply curve to be perfectly elastic. The essence of our analysis is that there are a large number of potential entrants, each of which faces the
same costs. As a result, the long-run market supply curve is horizontal at the minimum of average total cost. When the demand for the good increases, the long-run result is an increase in the number of firms and in the total quantity supplied, without an~ change in the price.

There are, howevc., two reasons that the long-run market supply curve might slope upward. The first is that some resource used in production may be available only in limited quantities. For example, consider the market for farm products. Anyone can choose to buy land and start a farm, but the quantity of land is limited. As more people become farmers, the price of farmland is bid up, which raises the costs of all farmers in the market. Thus, an increase in demand for farm products cannot induce an increase in quantity supplied without also inducing a rise in farmers’ costs, which in turn means a rise in price. The result is a long-run market supply curve that is upward sloping, even with free entry into farming.

Thus, for these two reasons, the long-run supply curve in a market may be upward sloping rather than horizontal, indicating that a higher price is necessary to induce a larger quantity supplied. Nonetheless, the basic lesson about entry and exit remains true. Because firms can enter and exit more easily in the long run than in the short run, the long-run supply curve is typically more elastic than the short run supply curve.

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