Entry, Exit, and Supply Curves: Constant Costs
Some industries have a flat supply curve. These are called constant cost industries. Take domain name registration: to increase the supply of domain names, we must
Some industries have a flat supply curve. These are called constant cost industries. Take domain name registration: to increase the supply of domain names, we must only increase the inputs by a negligible amount. That is why even as the Internet expands so rapidly, it still costs only about six or seven dollars to register a new domain name. By showing you how these industries respond to an increase in demand, we can explain why they are constant cost industries.
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Hello, I'm not quite understand why the answer for the last practice question is "The price of pajamas increases by less than $2." if the production cost for each pair of pajamas is increased by $2 already?
I believe the answer lies in the definition of "an increasing cost industry". Remember that in this type of industry, costs go up as output increases, This happens because firms with higher costs need to enter the industry to meet the higher output. But the reverse must also be true; costs will go down with lower output as higher-cost suppliers exit the industry. Now use the hint and remember what happens to the supply curve when you add a tax to something-it moves up with the tax, establishing a new equilibrium at a point of lower demand (and therefore lowered supply, i.e., output). The price will go up by less than $2 in the long run because only lower-cost suppliers will be left to fill this reduced demand (but note, the price will still increase by some amount!). This question was a tough one, the toughest (I think) in the course so far.
This is just a follow-on to the answer I gave above (but please remember I'm just another student, not a professor). Here's another way to look at the same problem, which really gets at the exact same phenomenon. Remember in an earlier discussion about taxes, the question was raised "who pays the tax?" If so, you'll recall that the answer depended on the relative elasticity of the demand vs. supply curves. In addition, it was made clear that any inelasticity (on either the supply or demand side) would result in some fraction of the tax burden falling on that side. Now in the current discussion, it was shown that the supply curve in an increasing cost industry has a positive slope, which is indicative of some degree of supply inelasticity, meaning that the suppliers will in fact incur some fraction of the "tax". But how does this happen in reality? When a consumer purchases a pair of the new pajamas, they will not pay the full new cost= (old price+tax (in this case $2)) but instead will only pay: (old price +fraction of the tax (i.e., something less than $2)). The only difference between the regulation and a tax is that if the $2 here was an actual tax, the consumer would probably directly pay the full tax but the supplier would have to pay his share in the form of a pre-tax price reduction (i.e., a price less than the original price).