Page 646 - Krugmans Economics for AP Text Book_Neat

Perfectly elastic long-run supply is actually a good assumption for many industries.
In this case we speak of there being constant costs across the industry: each firm, regard-
less of whether it is an incumbent or a new entrant, faces the same cost structure
(that is, they each have the same cost curve). Industries that satisfy this condition are
industries in which there is a perfectly elastic supply of inputs—industries like agri-
culture or bakeries. In other industries, however, even
the long-run industry supply curve slopes upward. The
usual reason for this is that producers must use some
input that is in limited supply (that is, their supply is at
least somewhat inelastic). As the industry expands, the
price of that input is driven up. Consequently, the cost
structure for firms becomes higher than it was when the
industry was smaller. An example is beach front resort
hotels, which must compete for a limited quantity of
prime beachfront property. Industries that behave like
iStockphoto this are said to have increasing costs across the industry. Fi-
nally, it is possible for the long-run industry supply
curve to slope downward, a condition that occurs when
the cost structure for firms becomes lower as the industry expands. This is the case in
industries such as the electric car industry, in which increased output allows for
economies of scale in the production of lithium batteries and other specialized in-
puts, and thus lower input prices. A downward-sloping industry supply curve indi-
cates decreasing costs across the industry.
Regardless of whether the long-run industry supply curve is horizontal, upward
sloping, or down ward sloping, the long-run price elasticity of supply is higher than the
short-run price elasticity whenever there is free entry and exit. As shown in Figure 60.4,
the long-run industry supply curve is always flatter than the short-run industry supply
curve. The reason is entry and exit: a high price caused by an increase in demand at-
tracts entry by new firms, resulting in a rise in industry output and an eventual fall in
price; a low price caused by a decrease in demand induces existing firms to exit, leading
to a fall in industry output and an eventual increase in price.
The distinction between the short-run industry supply curve and the long-run in-
dustry supply curve is very important in practice. We often see a sequence of events
like that shown in Figure 60.3: an increase in demand initially leads to a large price

figure 60.4

Comparing the Short-Run Price
Short-run industry
and Long-Run Industry
supply curve, S
Supply Curves
The long-run industry supply curve may slope
upward, but it is always flatter—more elastic— Long-run
than the short-run industry supply curve. This industry
is because of entry and exit: a higher price attracts supply
curve, LRS
new entrants in the long run, resulting in a rise
in industry output and a fall in price; a lower price
induces existing producers to exit in the long
run, generating a fall in industry output and a rise The long-run industry supply
in price. curve is always flatter—more
elastic—than the short-run
industry supply curve.

Quantity

604 section 11 Market Structures: Perfect Competition and Monopoly