Figure 9-13 Plants of Different Vintages in an Industry with
Continuous Technological Progress
What happens in a competitive industry in which technological change
does not occur as a single isolated event but instead happens more or less
continuously? Plants built in any one year will tend to have lower costs
than plants built in any previous year. This common occurrence is
illustrated in Figure 9-13.
Entry of progressively lower-cost firms forces price down, but older
plants with higher costs remain in the industry as long as price covers
their average variable costs. Plant 3 is the newest plant with the lowest
costs. Long-run equilibrium price will be determined by the average total
costs of plants of this type because entry will continue as long as the
owners of the newest plants expect to earn profits from them. Plant 1 is
the oldest plant in operation. It is just covering its AVC, and if the price
falls any further, it will be closed down. Plant 2 is a plant of intermediate
age. It is covering its variable costs and earning some contribution toward
its fixed costs. Losses at all but the newest plants, in parts (i) and (ii), are
shown by the shaded areas.