Introduction
Have you ever wondered how industries lower their costs as they increase their production? The answer lies in decreasing cost industries. In this type of industry, the long run supply curve slopes downwards, allowing for falling product prices due to reduced production costs.
You are viewing: The Fascinating World of Decreasing Cost Industries
The Economics Behind Decreasing Cost Industries
The phenomenon of decreasing cost industries can be explained by the concept of economies of scale. When an under-developed industry expands its output levels, firms benefit from cost savings resulting from economies of scale. Technological advancements often play a significant role in creating new products and services within these industries.
Take the example of the automobile industry. When cars were first introduced, they were considered luxuries due to their high prices. However, the introduction of mass production techniques, such as the assembly line, revolutionized the industry. These techniques made it possible to produce more cars at lower costs. As a result, the prices of cars decreased as output increased. Component part suppliers also benefited from reduced production costs, leading to a further decrease in input costs. Advanced robotics and lean manufacturing techniques have continued to drive down manufacturing costs in the industry.
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Visualizing the Decreasing Cost Industry
To better understand the dynamics of a decreasing cost industry, let’s analyze a graph. In this graph, a typical firm within the industry produces at a specific price and output combination indicated by point P and Q. This represents an equilibrium market-clearing price and output given the existing demand.
Now, imagine an increased demand for automobiles, represented by the shift of the demand curve from D to D’. In the short run, existing firms can only increase their output by utilizing their current production facilities. This, however, leads to increased costs per unit of output due to factors like overtime rates and additional hiring. Consequently, prices increase from P to P’.
The Long-Run Dynamics
The long run presents a different scenario. The profitability of the industry attracts existing firms and new entrants to invest in additional manufacturing facilities. This investment leads to a temporary increase in prices (P’), creating economic profits that incentivize further expansion. Over time, the increased number of firms and production facilities increases industry supply, shifting the supply curve from S to S’.
As illustrated in the graph, the equilibrium moves from point A to B, reflecting a small increase in output accompanied by a higher price. Eventually, the new supply curve intersects with the increased demand curve at point C, resulting in a lower price (P”) and significantly higher output (Q’). Points A and C represent long-run industry supply equilibrium, forming a downward sloping long-run supply curve (SL). This characteristic signifies that the industry operates as a decreasing cost industry.
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Examples of Decreasing Cost Industries
Real-world examples of decreasing cost industries fall primarily into two categories. The first includes industries that emerge from technological advances and have yet to mature fully. The early years of the automobile industry and advancements in computer technology serve as excellent examples of this.
The second category comprises industries that experience ongoing economies of scale, even at large output rates. Energy suppliers and utility companies, often referred to as natural monopolies, fall into this group. Nuclear power plants, for instance, benefit from a downward sloping long-run supply curve due to their ability to generate power at a more significant rate relative to the cost of investment.
While monopolized industries are typically discouraged, decreasing cost industries have their benefits. These industries allow for lower product prices, benefiting both consumers and society as a whole.
Conclusion
Understanding the concept of decreasing cost industries provides insights into the economics behind falling product prices. Technological advancements and economies of scale are driving factors in reducing production costs, allowing industries to supply more products at lower prices. Whether it’s the early years of the automobile industry or the power of nuclear plants, decreasing cost industries shape our economy and benefit society.
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