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🛒principles of microeconomics review

Increasing-Cost Industry

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

An increasing-cost industry is a market structure where the cost of production rises as the industry expands. This is in contrast to a constant-cost industry, where the cost of production remains the same regardless of the industry's size. The increasing costs in an increasing-cost industry are typically due to factors such as limited resources, higher input prices, or diminishing returns to scale.

5 Must Know Facts For Your Next Test

  1. In an increasing-cost industry, the supply curve slopes upward, indicating that as output increases, the cost per unit also rises.
  2. The upward-sloping supply curve in an increasing-cost industry is a result of the law of diminishing returns, where additional inputs lead to smaller increases in output.
  3. Factors that can contribute to increasing costs in an industry include limited natural resources, higher input prices, and the inability to fully exploit economies of scale.
  4. Increasing-cost industries are often found in industries that rely on scarce or finite resources, such as mining, agriculture, or certain manufacturing sectors.
  5. The long-run equilibrium in an increasing-cost industry is characterized by a higher price and lower quantity compared to a constant-cost industry.

Review Questions

  • Explain how the concept of diminishing returns to scale relates to the increasing-cost industry.
    • In an increasing-cost industry, the law of diminishing returns comes into play as the industry expands. As more variable inputs, such as labor or raw materials, are added to the fixed factors of production, the marginal product of those additional inputs decreases. This leads to higher per-unit costs, resulting in an upward-sloping supply curve. The diminishing returns to scale prevent the industry from fully exploiting economies of scale, which would otherwise lead to lower per-unit costs as output increases.
  • Describe the long-run equilibrium in an increasing-cost industry and how it differs from a constant-cost industry.
    • The long-run equilibrium in an increasing-cost industry is characterized by a higher price and lower quantity compared to a constant-cost industry. This is because the upward-sloping supply curve in an increasing-cost industry means that as output expands, the cost per unit also rises. In contrast, the constant-cost industry can expand production without experiencing increases in per-unit costs, leading to a lower equilibrium price and higher quantity. The long-run equilibrium in an increasing-cost industry reflects the industry's inability to fully exploit economies of scale due to the constraints of limited resources or other factors that drive up production costs.
  • Analyze the factors that can contribute to an industry being classified as an increasing-cost industry, and explain how these factors impact the industry's supply and pricing dynamics.
    • The key factors that can contribute to an industry being classified as an increasing-cost industry include limited natural resources, higher input prices, and the inability to fully exploit economies of scale. Limited natural resources, such as scarce raw materials or land, can drive up the costs of production as the industry expands and competes for these finite inputs. Higher input prices, such as rising wages or energy costs, can also lead to increasing per-unit costs as the industry grows. Additionally, if an industry is unable to fully realize economies of scale due to technological or other constraints, the benefits of increased production may be offset by the rising costs, resulting in an upward-sloping supply curve. These factors ultimately shape the supply and pricing dynamics in an increasing-cost industry, leading to a higher equilibrium price and lower quantity compared to a constant-cost industry.