AP_Krugman_Textbook

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

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 higherthan 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

604 section 11 Market Structures: Perfect Competition and Monopoly

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figure 60.4

Comparing the Short-Run

and Long-Run Industry

Supply Curves

The long-run industry supply curve may slope

upward, but it is always flatter—more elastic—

than the short-run industry supply curve. This

is because of entry and exit: a higher price attracts

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

in price.

Price

Quantity

Short-run industry

supply curve, S

Long-run

industry

supply

curve, LRS

The long-run industry supply

curve is always flatter—more

elastic—than the short-run

industry supply curve.