key term - Decreasing-Cost Industry

Definition

A decreasing-cost industry is a market structure where the average cost of production decreases as the total output of the industry increases. This is often due to economies of scale, where larger firms can produce goods more efficiently and at a lower per-unit cost than smaller firms. The concept of a decreasing-cost industry is particularly relevant in the context of long-run entry and exit decisions, as it can influence the dynamics of competition and market structure over time.

5 Must Know Facts For Your Next Test

1. In a decreasing-cost industry, the long-run supply curve slopes downward, indicating that the industry can expand output at a lower average cost per unit.
2. Decreasing-cost industries are often characterized by high fixed costs and low marginal costs, leading to significant economies of scale as output increases.
3. The presence of decreasing costs can create barriers to entry, as new firms may find it difficult to compete with the lower costs of established, larger firms.
4. Decreasing-cost industries may experience a natural monopoly or oligopoly, as the market can be most efficiently served by a small number of large firms.
5. The dynamics of entry and exit in a decreasing-cost industry can be complex, as the potential for cost savings may attract new firms, but the difficulty of competing with established players can also deter entry.

Review Questions

• Explain how the concept of decreasing-cost industry relates to the long-run entry and exit decisions of firms.
  • In a decreasing-cost industry, the long-run supply curve slopes downward, indicating that as industry output increases, the average cost of production decreases. This creates a situation where larger, more established firms can enjoy significant economies of scale and produce at a lower per-unit cost than smaller firms. As a result, the dynamics of entry and exit in a decreasing-cost industry can be complex. The potential for cost savings may attract new firms to enter the market, but the difficulty of competing with the lower costs of larger, more efficient firms can also deter entry. This can lead to a market structure characterized by a small number of large firms, potentially creating a natural monopoly or oligopoly.
• Analyze how the presence of decreasing costs in an industry can influence the market structure and the behavior of firms.
  • The presence of decreasing costs in an industry can significantly influence the market structure and the behavior of firms. Decreasing-cost industries are often characterized by high fixed costs and low marginal costs, leading to substantial economies of scale as output increases. This can create barriers to entry, as new firms may find it difficult to compete with the lower costs of established, larger firms. As a result, the market may tend towards a natural monopoly or oligopoly, with a small number of large firms dominating the industry. The dynamics of entry and exit can be complex, as the potential for cost savings may attract new firms, but the difficulty of competing with the lower costs of larger players can also deter entry. Firms in a decreasing-cost industry may engage in strategic behavior, such as investing in capacity expansion or pursuing mergers and acquisitions, to maintain their competitive advantage and market share.
• Evaluate the potential implications of a decreasing-cost industry for consumer welfare and the role of government regulation in such markets.
  • The presence of a decreasing-cost industry can have significant implications for consumer welfare and the role of government regulation. On one hand, the cost savings associated with economies of scale may allow firms to offer lower prices to consumers, potentially improving affordability and access. However, the tendency towards a natural monopoly or oligopoly in these industries can also lead to a lack of competition, which may result in higher prices, reduced innovation, and suboptimal outcomes for consumers. In such cases, government regulation may be necessary to ensure fair competition, protect consumer interests, and prevent the abuse of market power by dominant firms. Regulators may need to consider policies such as antitrust enforcement, price regulation, or the promotion of market entry to address the potential challenges posed by decreasing-cost industries and ensure that consumer welfare is not compromised.

Related terms

Economies of Scale:

Economies of scale refer to the cost advantages that businesses obtain due to their scale of operation, with larger firms able to produce goods at a lower average cost per unit than smaller firms.

Long-Run Equilibrium:

Long-run equilibrium is a state where firms in an industry have fully adjusted to market conditions, and entry and exit decisions have been made such that no firm has an incentive to change its scale of production.

Market Structure:

Market structure refers to the characteristics of a market, such as the number of firms, the degree of product differentiation, and the ease of entry and exit, which can influence the behavior and performance of firms in the industry.