October 8, 2015 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
Today's Index
Yesterday's Index

Help us compile the AmosWEB Free Lunch Index. Tell us about your last lunch.

Skipped lunch altogether.
Bought by another.
Ate lunch at home.
Brought lunch from home.
Fast food drive through.
Fast food dine in.
All-you-can eat buffet.
Casual dining with tip.
Fancy upscale with tip.

More About the Index
Favorite Beatle?


LABOR MARKET: A market that exchanges the services of labor resources. For the macroeconomy, this is a critical aspect of the aggregate resource markets, especially the short-run condition of rigid prices. Labor market wages tend to be rigid in short run. Such wage rigidity, was well as other short run problems, prevent labor markets from achieve equilibrium. The result is either unemployment or overemployment, both of which prevent long-run equilibrium in the aggregate market.

Visit the GLOSS*arama


A perfectly competitive industry with a negatively-sloped long-run industry supply curve that results because expansion of the industry causes lower production cost and resource prices. A decreasing-cost industry occurs because the entry of new firms, prompted by an increase in demand, causes the long-run average cost curve of each firm to shift downward, which decreases the minimum efficient scale of production.
The primary reason for a decreasing-cost industry is that an increase in demand triggers lower production cost and a downward shift of the long-run average cost curve as new firms entering the industry force down the prices of key resources. This could be because a key resource is able to take advantage of economies of scale or decreasing average cost in it is own production and supply. The entry of new firms into the cable television industry might, for example, enable lower cost of using communication satellites. The entry of new firms into the manufacturing industry in a given city might enable a lower cost of electricity.

First Demand

The Decreasing-Cost
Zucchini Industry
The Zucchini Market

The perfectly competitive Shady Valley zucchini market can be used to illustrate a decreasing-cost industry. The original market equilibrium is presented in the exhibit to the right, with the supply curve S and the demand curve D. The market equilibrium price is Pe and the equilibrium quantity is Qe.

The first step in identifying the long-run industry supply curve for a decreasing-cost industry is with an increase in demand. Click the [Demand Shift] button to illustrate the shift of the demand curve to D'. Note that with the increase in demand, the market price of zucchinis increases to Pe' and the equilibrium quantity rises to Qe'.

The higher price and larger quantity are achieved as each existing firm in the industry responds to the demand shock. The higher price that buyers are willing to pay induces existing firms to increase their quantities supplied as they move along their individual marginal cost curves. The market, as such, moves along the original market supply curve from one equilibrium point to a higher equilibrium point.

However, the higher price leads to above-normal economic profit for existing firms. And with freedom of entry and exit, economic profit attracts kumquat, cucumber, and carrot producers into this zucchini industry. An increase in the number of firms in the zucchini industry then causes the market supply curve to shift. How far this curve shifts and where it intersects the new demand curve, D', determines that the zucchini market is a decreasing-cost industry.

The Supply Response

Economic profit induces non-zucchini firms to enter the zucchini industry. People like Dan the kumquat man begin producing zucchinis. As these new firms enter the zucchini industry, the market supply curve shifts rightward. The shift of the supply curve to S' can be seen with a click of the [Supply Shift] button. This new supply curve intersects the new demand curve, D', at the equilibrium price of Po and the equilibrium quantity of Qo.

The key for a decreasing-cost industry is how far the supply curve shifts. For a decreasing-cost industry the shift is relatively far. As new firms enter the industry, they force down the resource prices and enable lower production cost. Perhaps the price of zucchini seeds falls. Maybe the price of zucchini fertilizer or zucchini shovels is lower.

Whatever the actual resource price, the end result is that the long-run average cost curve shifts downward. The minimum efficient scale for a given perfectly competitive firm is now at a lower cost. This means that they can produce the extra quantity demanded by the zucchini buyers at a lower per unit cost than had prevailed.

The main point of interest is that the new equilibrium price is lower than the original. To display the resulting long-run supply curve for this decreasing cost industry click the [Long-Run Supply Curve] button. The negative slope of the this long-run industry supply curve (LRS) indicates a decreasing-cost industry.


Recommended Citation:

DECREASING-COST INDUSTRY, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2015. [Accessed: October 8, 2015].

Check Out These Related Terms...

     | long-run industry supply curve | increasing-cost industry | constant-cost industry |

Or For A Little Background...

     | supply | supply curve | perfect competition | perfect competition, characteristics | perfect competition, long-run adjustment | perfect competition, efficiency | long-run, microeconomics | long-run production analysis | minimum efficient scale | long-run average cost | economies of scale |

And For Further Study...

     | perfect competition, long-run production analysis | perfect competition, long-run equilibrium conditions | breakeven output | economies of scale | diseconomies of scale |

Search Again?

Back to the WEB*pedia


State of the ECONOMY

Federal Funds Rate
August 26, 2015

More Stats

[What's This?]

Today, you are likely to spend a great deal of time wandering around the downtown area trying to buy either a how-to book on home repairs or a large, stuffed kitty cat. Be on the lookout for strangers with large satchels of used undergarments.
Your Complete Scope

This isn't me! What am I?

Paper money used by the Commonwealth of Massachusetts prior to the U.S. Revolutionary War, which was issued against the dictates of Britain, was designed by patriot and silversmith, Paul Revere.
"Do not stop thinking of life as an adventure. You have no security unless you can live bravely, excitingly, imaginatively, unless you can choose a challenge instead of a competence. "

-- Eleanor Roosevelt, first lady

Average Revenue, Autoregressive
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback

| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2015 AmosWEB*LLC
Send comments or questions to: WebMaster