Entry, Exit, and Supply Curves: Increasing Costs

Summary

This video explains how industry supply curves are derived from the cost structures of individual firms and their entry/exit decisions. It explores three types of industries: increasing cost, constant cost, and decreasing cost, each affecting the supply curve differently. The focus is on how costs change with output and how firms adjust their production levels based on market prices. Examples such as oil extraction, mining, and nuclear engineering highlight industries with increasing costs, where higher prices are needed to attract more firms. The video offers a clear understanding of how supply curves shape economic behavior in various industries.

Takeaways

• 😀 The supply curve of an industry is derived from the cost curves and entry/exit decisions of individual firms.
• 😀 Industry costs can behave in three ways: increasing, constant, or decreasing as output increases.
• 😀 In an increasing cost industry, the supply curve is upward sloping, meaning higher-cost firms must enter to meet increased demand.
• 😀 A constant cost industry has a flat supply curve because industry costs do not change with increased output.
• 😀 A decreasing cost industry, which is rare, has a downward-sloping supply curve due to decreasing costs as production expands.
• 😀 For an increasing cost industry, higher-cost producers enter the market as the price rises, leading to a higher total industry output.
• 😀 Oil, mining, and coffee are examples of increasing cost industries because expanding production requires more costly resources or inputs.
• 😀 In industries like oil, the cost rises as deeper resources are tapped, which leads to higher average costs for firms operating in such industries.
• 😀 Nuclear engineers represent an increasing cost industry due to a limited supply of qualified professionals, pushing up wages as demand grows.
• 😀 Gasoline and electricity are also increasing cost industries because their production relies on oil and coal, respectively, both of which are increasing cost industries.

Q & A

What are the three types of industry cost structures discussed in the video?

The three types of industry cost structures are: increasing cost industries, where costs rise as output increases; constant cost industries, where costs remain the same regardless of output changes; and decreasing cost industries, where costs decrease as output increases.

What is the relationship between firm entry and industry supply curves?

The industry supply curve is derived from the entry and exit decisions of firms. As firms enter or exit the market based on profitability, their individual cost curves contribute to the overall industry supply curve.

Why does the oil industry demonstrate an increasing cost structure?

The oil industry demonstrates an increasing cost structure because as demand for oil rises, firms must extract oil from more difficult and costly locations (deeper reserves), raising production costs. This causes the industry supply curve to slope upward.

At what price does Firm 1 break even in the oil industry example?

Firm 1 breaks even at a price of $17 per unit of oil, as this is the price at which its average cost curve intersects the market price, meaning it neither makes a profit nor incurs a loss.

What happens to industry output when the price of oil increases beyond $17?

As the price of oil increases beyond $17, Firm 1 enters the market, and output increases to 4 units. As the price continues to rise, Firm 2 also enters the market once the price reaches $29, increasing total industry output.

Why do higher cost firms enter the market at higher prices?

Higher cost firms enter the market at higher prices because they require a higher price to cover their production costs. For example, Firm 2 in the oil industry enters only when the price reaches $29, which allows it to break even.

How does the entry of additional firms affect the industry supply curve in an increasing cost industry?

In an increasing cost industry, the entry of additional firms pushes the supply curve upward, because each new firm has higher production costs, thus requiring higher prices to cover their costs and make a profit.

Can you give examples of other increasing cost industries besides oil?

Other examples of increasing cost industries include mining industries like copper, gold, and silver, as well as industries like coffee production, which is limited by geographical factors, and the nuclear engineering sector, where there are few qualified professionals.

What is the key factor that leads to increasing costs in these industries?

The key factor leading to increasing costs in these industries is the limited availability or scarcity of essential resources or skilled labor. As demand for the product rises, firms must use more expensive inputs or seek resources in harder-to-reach locations.

How does the concept of increasing cost industries apply to sectors like gasoline and electricity?

Gasoline and electricity are increasing cost industries because they rely on inputs from other increasing cost industries. For example, more gasoline requires more oil, and additional electricity production requires more coal, both of which increase in cost as demand for these resources rises.