Decreasing-Cost+Industry

If demand for a good increases, the supply in the long run will increase because more firms will enter the industry. The quantity will obviously incrcease, but if the increase in supply is larger than the increase in demand, then the price will decrease (see figure below). The reason that a shift in supply would be larger than a shift in demand is if the industry is at increasing returns to scale on the long run-ATC curve. It is not necessary to know much about decreasing-cost industry for the AP test: all you need to know is that as the industry expands, the costs decrease and the supply increases. media type="youtube" key="vlBiUNVfXJs" height="344" width="425" This video shows an example of a cost decreasing industry because it shows the many different products that are avalible.

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=decreasing-cost+industry http://www.blackwellreference.com/public/tocnode?id=g9780631233176_chunk_g97814051006637_ss1-3 http://glossary.econguru.com/economic-term/decreasing-cost+industry/

Sample question: true or false: if the stapler industry increases in the long run and the only significant change is a decrease in the cost of stapler-making machines, the quantity will increase and price will increase (answer below)

sample answer: false: price will decrease b/c supply will increase.