Long-Run Supply Curve

Definition

The long-run supply curve represents the relationship between the quantity supplied and the price of a good or service in the long run, where all factors of production can be adjusted. It reflects the changes in the production capacity of a firm or industry as they respond to changes in market price over an extended period of time.

5 Must Know Facts For Your Next Test

1. The long-run supply curve is generally upward-sloping, indicating that as the price of a good rises, the quantity supplied will also increase.
2. In the long run, firms can adjust all factors of production, including the size of their facilities, the number of workers employed, and the amount of capital equipment used.
3. The shape of the long-run supply curve is influenced by the presence of economies or diseconomies of scale in the industry.
4. If an industry experiences economies of scale, the long-run supply curve will be downward-sloping, as higher production levels lead to lower average costs.
5. Conversely, if an industry faces diseconomies of scale, the long-run supply curve will be upward-sloping, as higher production levels lead to higher average costs.

Review Questions

• Explain how the long-run supply curve differs from the short-run supply curve.
  • The key difference between the long-run and short-run supply curves is the ability of firms to adjust all factors of production. In the short run, at least one factor of production is fixed, limiting a firm's ability to change its output in response to price changes. In the long run, however, all factors can be adjusted, allowing firms to expand or contract their production capacity as needed. This flexibility is reflected in the shape of the long-run supply curve, which is generally upward-sloping, indicating that firms will produce more as prices rise.
• Describe how economies of scale and diseconomies of scale affect the shape of the long-run supply curve.
  • The presence of economies or diseconomies of scale in an industry can significantly impact the shape of the long-run supply curve. If a firm or industry experiences economies of scale, where average costs decrease as output increases, the long-run supply curve will be downward-sloping. This is because higher production levels lead to lower average costs, allowing firms to supply more at lower prices. Conversely, if a firm or industry faces diseconomies of scale, where average costs rise as output increases, the long-run supply curve will be upward-sloping. In this case, higher production levels result in higher average costs, leading firms to supply less at higher prices.
• Analyze how changes in factors of production, such as technology or resource availability, can shift the long-run supply curve.
  • Changes in the factors of production can cause shifts in the long-run supply curve. For example, technological advancements that improve the efficiency of production processes can lead to a rightward shift of the long-run supply curve, as firms can produce more at any given price. Similarly, an increase in the availability or a decrease in the cost of key resources, such as raw materials or labor, can also result in a rightward shift of the long-run supply curve. Conversely, a decrease in the availability or an increase in the cost of factors of production can cause a leftward shift of the long-run supply curve, as firms are able to produce less at any given price. These shifts in the long-run supply curve reflect the underlying changes in the production capacity of the industry.

Related terms

Short-Run Supply Curve: The short-run supply curve represents the relationship between quantity supplied and price in the short run, where at least one factor of production is fixed, limiting a firm's ability to adjust its output.

Economies of Scale:

Economies of scale refer to the cost advantages that firms experience as their scale of production increases, leading to a lower average cost per unit.

Diseconomies of Scale:

Diseconomies of scale occur when a firm's average costs begin to rise as its scale of production increases, often due to coordination and management challenges.