Increasing Cost Industries

… a core concept in Economic Analysis and Atlas102

Concept description

Alex Tabarrok (reference below, video on right) shows how the supply curve is derived from individual firm entry and exit decisions in an industry where costs increase as industry output increases.

What industries have increasing costs?

• Any industry where it is difficult to exactly duplicate inputs (e.g., oil, copper, coffee, nuclear industries)
• Any industry that buys a large fraction of the output of an increasing cost industry

Upward sloping supply curve

Tabarrok illustrates that the supply curve will be upward sloping with a two-firm example.

Practice questions

From http://www.mruniversity.com/node/264285, accessed 7 May 2016.

1. What is the least common cost structure for an industry?
   1. Costs decrease as industry output increases
   2. Costs increase as industry output increases
   3. Costs stay the same as industry output increases
2. In the ancient Western world, incense was one of the first commodities transported long distances. It grew only in the south of the Arabian Peninsula (modern-day Yemen, known then as Arabia Felix) and was transported by camel to Alexandria and the Mediterranean civilizations, notably the Roman Republic. As the republic expanded into a richer and larger empire, the demand for incense grew and planters in Arabia added a second and then a third annual crop (though this incense was not as high of a quality). Cultivation also crossed to the Horn of Africa (modern-day Oman) even though such fields were farther away from Rome. The fact that additional annual crops were of lower quality indicates that this industry has
   1. Increasing costs
   2. Decreasing costs
   3. Constant costs
   4. Indeterminate from the given information
3. It’s more costly to grow incense in Eastern Africa than in Arabia Felix. Which region would you expect to see more incense grown in?
   1. Eastern Africa 
   2. Arabia Felix

Atlas topic, subject, and course

Producer Theory and Competition (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Alex Tabarrok, Entry, Exit, and Supply Curves: Increasing Costs (7-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/profit-maximization-average-cost, accessed 7 May 2016.

Page created by: Ian Clark, last modified 7 May 2016.

Image: Alex Tabarrok, minute 0.14 of Entry, Exit, and Supply Curves: Increasing Costs (7-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/profit-maximization-average-cost, accessed 7 May 2016.