In this video, we talk about the special case of the decreasing cost industry. As output increases, costs will continue to fall, and more firms will enter which,
In this video, we talk about the special case of the decreasing cost industry. As output increases, costs will continue to fall, and more firms will enter which, again, increases output. It’s a virtuous circle!
At the end of this video, we review the major points made in this section. If you find that something doesn’t quite make sense, feel free to re-watch videos as many times as you’d like.
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Practice Question no. 3. Why after 40 years cost structure of Californian Doughnut constant?
Practice Question no. 4. In long run how does decrease in demand increases the price of the carpet?
Question 3: The demand for California doughnuts may have increased over the last 40 years but that demand was too small to pressure the stock of inputs (sugar, flour) and raise their price. Inputs are just as abundant, their price is the same, the doughnut recipe is the same. This is why the production cost has not increased. The cost has not decreased because there are no cluster effects to the doughnut production. Entrants in the doughnut industry do not lower their production costs just by placing themselves in the proximity of other doughnut producer. A doughnut producer does not specialize inputs around it, does not create special knowledge which can then be used by other entrants.
Question 4: According to the video, the cost decreases as new suppliers come in to generate more output, because their activity also generates specialized knowledge (for example in the form of trained workers) which can be used by all other suppliers. If demand decreases more suppliers exit the carpet market. As they leave, Dalton, Georgia starts doing something else. The remaining specialized knowledge around the still existing suppliers erodes (for example workers retire). The few suppliers left will have to hire new workers but pay the cost of their training.
With the use of online education, can the education industry shift from increasing cost industry to decreasing cost industry?
Yes, I can see how that works using the cluster model in the video. An output increase using online components specializes certain inputs. This makes new entrants want to make use of the new specialized inputs and so place themselves in the proximity of the online area of education. New entrants further increase output.