What would be the long-run equilibrium result of output expansion in a decreasing-cost industry?
1 Answer | Add Yours
In the long term, the result of expansion in such an industry would be a decrease in the price of the good and an increase in the equilibrium quantity.
A decreasing-cost industry is typically in perfect competition. It is an industry in which there has been a demand shock that has led to increased demand for the good. With increased demand, firms will want to increase their production to create a higher quantity supplied. The new equilibrium in the short term will be at a much higher price than the previous equilibrium. This will cause firms to make excess profits.
When firms in this sort of a market make excess profits, other firms are attracted to the market. This causes supply to rise. When the supply rises in a decreasing-cost industry, the equilibrium price drops. This is because the supply rises enough to cause an overall decrease in price even with the increase in demand.
To see this process illustrated by graphs, please follow this link.
Overall, then, the impact of output expansion in a decreasing-cost industry will be a lower equilibrium price and a higher equilibrium quantity.
Join to answer this question
Join a community of thousands of dedicated teachers and students.Join eNotes