Increasing-Cost Industries

Definition

Increasing-cost industries are economic sectors where the average cost of production rises as the industry's output increases. This is due to the limited availability or rising costs of key inputs, such as land, labor, or raw materials, which make it more expensive for firms to expand production within the industry.

5 Must Know Facts For Your Next Test

1. Increasing-cost industries are characterized by the law of diminishing returns, where additional inputs of a variable factor (such as labor) yield smaller and smaller increases in output.
2. The limited availability or rising costs of key inputs, such as land, natural resources, or skilled labor, can contribute to the increasing-cost nature of an industry.
3. Firms in increasing-cost industries face higher marginal costs as they expand production, leading to a positively sloped long-run supply curve.
4. The long-run equilibrium in an increasing-cost industry is characterized by a higher price and lower output compared to a constant-cost or decreasing-cost industry.
5. Examples of increasing-cost industries include agriculture, mining, and some manufacturing sectors that rely on scarce or expensive inputs.

Review Questions

• Explain how the limited availability or rising costs of key inputs can lead to an increasing-cost industry.
  • In an increasing-cost industry, the limited availability or rising costs of key inputs, such as land, natural resources, or skilled labor, make it more expensive for firms to expand production. As firms try to increase their output, they must use less efficient or more costly inputs, leading to a rise in the average cost of production. This results in a positively sloped long-run supply curve, where the price must increase to incentivize firms to produce more, unlike in constant-cost or decreasing-cost industries.
• Describe the characteristics of the long-run equilibrium in an increasing-cost industry and how it differs from other industry types.
  • The long-run equilibrium in an increasing-cost industry is characterized by a higher price and lower output compared to a constant-cost or decreasing-cost industry. This is because the limited availability or rising costs of key inputs make it more expensive for firms to expand production, leading to a positively sloped long-run supply curve. As a result, the market-clearing price is higher, and the quantity supplied is lower in an increasing-cost industry's long-run equilibrium, reflecting the higher production costs faced by firms.
• Analyze how the law of diminishing returns contributes to the increasing-cost nature of an industry and its impact on the long-run supply curve.
  • The law of diminishing returns states that as additional units of a variable input (such as labor) are added to a fixed input (such as land), the marginal product of the variable input will eventually decrease. In an increasing-cost industry, this means that as firms try to expand production by adding more of the variable input, they will face higher marginal costs due to the diminishing returns. This results in a positively sloped long-run supply curve, where the price must increase to incentivize firms to produce more, unlike in constant-cost or decreasing-cost industries where the long-run supply curve is horizontal or negatively sloped, respectively.

Related terms

Constant-Cost Industry: An industry where the average cost of production remains unchanged as the industry's output increases, typically due to the availability of abundant and inexpensive inputs.

Decreasing-Cost Industry: An industry where the average cost of production declines as the industry's output increases, often due to economies of scale and technological advancements.

Long-Run Equilibrium:

The state of an industry where firms have adjusted their production levels to achieve the most efficient scale of operation, and new firms can freely enter or exit the market without making economic profits or losses.