Question

I am so desperate to know how to figure out if the industry is increasing, decreasing or constant cost industry by using given supply function, for example,

S(p)= 200p - 3000.

Please explain in detail

Thanks

Answer 1

The industry for a good is termed a decreasing cost industry if the long run supply curve of the good is downward sloping. It means an increase in the quantity supplied casues a decrease in the price.

The industry for a good is termed a increasing cost industry if the long run supply curve of the good is increasing sloping. It means an increase in the quantity supplied casues a increase in the price.

The industry for a good is termed a constant cost industry if the long run supply curve of the good is constant and horizontal. It means an increase in the quantity supplied casues a no change in the price.

For example:

• Q = 200p -3000

=> p = (Q + 3000) / 200

=> dp / dQ = 1 /200

it implies that increase in Q leads to increase in p. Hence, the industry is increasing cost.

• P = 200

=>dP / dQ = 0

It implies that increase in Q leads to no change in P. Hence, the industry is constant cost.

• P = -0.25Q + 25

=> dP / dQ = -0.25

It implies that increase in Q leads to decrease in P. Hence, the industry is decreasing cost.