Constant Cost Industry and Horizontal Supply
An industry's supply curve shows the relationship between the price of a good and the quantity supplied. In the long run, firms can adjust all their inputs, and new firms can enter or exit the industry.
Horizontal Long Run Supply Curve
A horizontal long run supply curve signifies that the industry can supply any amount of output at a specific, constant price. This occurs when the costs of production do not change as the industry expands or contracts its output level. Essentially, the price required to induce firms to produce more output remains unchanged.
Constant Cost Industry Characteristics
An industry with such a supply curve is defined as a constant cost industry. Key features include:
- Input prices (like wages or raw materials) are unaffected by the level of industry output.
- The cost per unit of output remains stable even when the industry produces more.
- An increase in demand leads to an increase in quantity supplied along the horizontal curve without a change in price.
Why Other Options Are Incorrect
- Increasing Cost Industry: Experiences rising input costs as output increases, leading to an upward-sloping long run supply curve.
- Decreasing Cost Industry: Benefits from falling input costs as output increases (due to economies of scale or technological advancements), resulting in a downward-sloping long run supply curve.
- Efficient Industry: This term broadly refers to an industry operating optimally but does not specifically define the shape of its long run supply curve.
Therefore, the industry whose long run supply curve is horizontal is the constant cost industry.
Important Questions from Price determination under different market forms
‘Oligopoly’ refers to:
Which of the following statements are true regarding price and output determination under perfect competition?
A. A firm is a price taker
B. In the long run, a firm is in equilibrium when its AR = MR = LAC = LMC
C. A firm is in equilibrium in the short run only when its AC = AR = MR = MC
D. A firm reaches its shut-down point when price goes below its AC
E. A firm fixes the price of its products when AR = MR
Choose thecorrectanswer from the options given below:
Which of the following statements regarding price and output determination under monopoly are correct?
A. A monopoly firm can fix its price anywhere along its demand curve
B. Even during short run when a monopoly firm earns normal profit, it produces less than its optimum capacity
C. The slope of monopoly's MR curve is twice the slope of its AR curve
D. Price discrimination is possible only when demand curves are identical in two markets
E. Equilibrium price of a monopolist is always higher than that of a perfectly competitive firm.
Choose thecorrectanswer from the options given below:
A price ceiling below the equilibrium price of a commodity leads to
A. Commodity glut in market
B. Shortage of commodity
C. Demand erosion
D. Black marketing
Choose the correct answer from the options given below:
Given below are two statements, one is labelled as Assertion A and the other is labelled as Reason R
Assertion A: An oligopolist firm cannot decide the price it wishes to charge as well as the quantity it wishes to sell, both at the same time.
Reason R: An oligopolist firm takes into consideration the competitor's actions and counter actions because of a strong interdependence among the competitive firms
In light of the above statements, choose the most appropriate answer form the options given below
