Question

When a resource used in the production of a good sold in a competitive market is available in only limited quantities, the long-run supply curve is likely to be upward sloping. True or False? Explain

Answer 1

The answer is True

There are a large number of potential entrants, each facing the same costs. As a result , the long-term market supply curve is horizontal at the peak of the average overall expense. As the demand for good increases, the long-term effect is an increase in the number of firms and the overall quantity supplied, without any change in the quality. There are, however, two explanations why the long-term market supply curve can rise. The first is that some of the materials used in manufacturing can only be available in small quantities. The second explanation for the upward sloping supply curve is that businesses can have different costs.

If companies have different costs, certain businesses will also make a profit in the long run. For this situation, the market price represents the average overall expense of the marginal firm – the business that would leave the market if the price were lower. This company earns zero profits, but firms with lower costs are generating significant profits.