---
title: "Decreasing Cost Industry — AP Micro Definition & Exam Guide"
description: "A decreasing cost industry has falling average costs as industry output grows, giving a downward-sloping long-run supply curve. Key for AP Micro Topic 3.7."
canonical: "https://fiveable.me/ap-micro/key-terms/decreasing-cost-industry"
type: "key-term"
subject: "AP Microeconomics"
unit: "Unit 3"
---

# Decreasing Cost Industry — AP Micro Definition & Exam Guide

## Definition

A decreasing cost industry is a perfectly competitive industry where average costs fall as the whole industry expands, so the long-run supply curve slopes downward and the new long-run equilibrium price ends up lower than the original price after demand increases.

## What It Is

A decreasing cost industry is a perfectly competitive industry where expansion makes [production](/ap-micro/unit-3/production-function/study-guide/euPM8nkZyHZuiKhQJFye "fv-autolink") cheaper for everyone. When demand rises and new firms enter, the industry's growth lowers input costs or improves [efficiency](/ap-micro/key-terms/efficiency "fv-autolink") across the board (think cheaper specialized suppliers, better infrastructure, or a deeper pool of trained workers). Because every firm's cost curves shift down as the industry grows, the long-run supply curve slopes downward instead of being flat or upward-sloping.

Here's the story the AP exam wants you to tell. Demand increases, price spikes, existing firms earn [economic profit](/ap-micro/key-terms/economic-profit "fv-autolink"), and new firms enter (no barriers to entry, per EK PRD-3.A.1). But in a decreasing cost industry, all that entry pushes input prices down, so firms' ATC curves shift downward. Entry keeps happening until economic profit returns to zero, and the new long-run equilibrium price is actually *below* where it started. More output, lower price. That's the signature move.

## Why It Matters

This term lives in [Unit 3](/ap-micro/unit-3 "fv-autolink"), Topic 3.7 (Perfect Competition), and supports learning objectives 3.7.A and 3.7.B, which ask you to explain equilibrium and the adjustment to long-run equilibrium in perfectly competitive markets. The constant cost case is the default story in most [AP Micro](/ap-micro "fv-autolink") classes, where the long-run supply curve is horizontal. Decreasing cost industries are the twist on that story, and the exam loves testing whether you can read the slope of the long-run supply curve and explain *why* it slopes that way. If you can classify an industry as constant, increasing, or decreasing cost from a price path or a graph, you've shown you actually understand the entry-and-exit mechanism, not just memorized it.

## Connections

### [Increasing Cost Industry (Unit 3)](/ap-micro/key-terms/increasing-cost-industry)

The mirror image. In an [increasing cost industry](/ap-micro/key-terms/increasing-cost-industry "fv-autolink"), expansion bids up input prices, so the long-run supply curve slopes upward and the new equilibrium price ends up higher than before. Same entry mechanism, opposite cost effect.

### [Long-run Equilibrium (Unit 3)](/ap-micro/key-terms/long-run-equilibrium)

In every case (constant, increasing, decreasing cost), entry continues until P = minimum ATC and economic profit is zero. The industry type only changes *where* that minimum ATC sits when the dust settles.

### [Barriers to Entry (Unit 3)](/ap-micro/key-terms/barriers-to-entry)

The whole decreasing cost story depends on free entry. If barriers blocked new firms, profits would persist and the industry-wide cost decline would never get triggered. That's why this concept only applies to perfect competition, not [monopoly](/ap-micro/key-terms/monopoly "fv-autolink").

### [Average Total Cost (Unit 3)](/ap-micro/key-terms/average-total-cost)

The graphical tell is that each [firm](/ap-micro/key-terms/firm "fv-autolink")'s ATC curve shifts downward as the industry expands. On a side-by-side firm-and-market graph, that downward ATC shift is what lets price settle below its original level.

## On the AP Exam

This shows up almost exclusively in multiple choice, usually in one of two stems. The first gives you a demand shock and tells you where price lands in the long run, then asks you to classify the industry. If price returns to its original level, it's constant cost; if it ends up lower, it's decreasing cost. The second asks directly why a decreasing cost industry's long-run supply curve slopes downward, and the answer is that industry expansion lowers input costs or shifts firms' cost curves down. No released FRQ has used this term verbatim, but FRQs regularly ask you to graph the adjustment to long-run equilibrium after a demand shift, and knowing the three industry types keeps you from assuming price always bounces back to its starting point.

## decreasing cost industry vs Economies of scale

Economies of scale describe ONE firm's costs falling as that firm produces more (moving down its own long-run ATC curve). A decreasing cost industry is about the whole industry. As total industry output expands, every firm's cost curves shift down because inputs get cheaper. A firm in a decreasing cost industry can be at its minimum ATC and still see costs fall when the industry grows around it. Scale is a firm-level idea; industry cost type is a market-level idea.

## Key Takeaways

- A decreasing cost industry has a downward-sloping long-run supply curve because industry expansion lowers input costs and shifts firms' ATC curves down.
- After a permanent increase in demand, the new long-run equilibrium price in a decreasing cost industry is lower than the original price.
- The adjustment mechanism is the same as always in perfect competition: short-run profit attracts entry, and entry continues until economic profit returns to zero.
- Constant cost industries have a horizontal long-run supply curve, increasing cost industries have an upward-sloping one, and decreasing cost is the downward-sloping case.
- Don't confuse this with economies of scale. Economies of scale are about one firm getting bigger; a decreasing cost industry is about the entire industry's growth lowering everyone's costs.

## FAQs

### What is a decreasing cost industry in AP Micro?

It's a perfectly competitive industry where average costs fall as total industry output expands, often because growth makes inputs cheaper. The result is a downward-sloping long-run supply curve, so price ends up lower after the industry grows.

### Why does the long-run supply curve slope downward in a decreasing cost industry?

Because industry expansion lowers input prices or improves production conditions, shifting every firm's ATC curve down. Entry stops at zero economic profit, but that zero-profit price is now lower than before, so each point on the long-run supply curve sits below the last.

### Is a decreasing cost industry the same as economies of scale?

No. Economies of scale mean a single firm's average costs fall as that firm produces more. A decreasing cost industry means the entire industry's expansion shifts every firm's cost curves down, which is an external effect, not something one firm controls.

### How is a decreasing cost industry different from a constant cost industry?

In a constant cost industry, the long-run supply curve is horizontal and price returns to its original level after a demand shock. In a decreasing cost industry, the curve slopes downward and the new long-run price is lower than the original.

### Do firms in a decreasing cost industry earn economic profit in the long run?

No. Like all perfectly competitive industries, free entry drives economic profit to zero in the long run (P = minimum ATC). The 'decreasing cost' label only tells you that the zero-profit price falls as the industry expands.

## Related Study Guides

- [3.7 Perfect Competition](/ap-micro/unit-3/perfect-competition/study-guide/T08vY2meNhtpbLCT83uH)

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