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constant cost industry

Robert E. McAuliffe


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A constant cost industry is one whose long run supply curve is horizontal at the constant (average) cost of production ( see long run cost curves ). As the industry expands or contracts, the long run average cost of producing output remains the same. It should be noted that this does not necessarily mean that the firm's production technology exhibits constant returns to scale ; the industry could expand through the entry of additional identical firms with U‐shaped average cost curves where each firm operates at the minimum point on its average total cost curve. When demand for a product increases, existing firms produce more output along the short run supply curve ( see short run cost curves ) since it is profitable to do so at a higher price. If this increase in demand occurred in a competitive market when the industry was in long run equilibrium , the higher price will cause existing firms to earn economic profits since price will equal marginal cost above average total cost ( see economic profit ; marginal cost ). Managers should note that these economic profits will attract entry into the industry in the long run as long as there are no barriers to entry , and this entry will cause the short run supply curve to eventually shift out and lower the price of the product. Entry will continue until firms in the industry can only earn the normal, risk‐adjusted rate of return. ... log in or subscribe to read full text

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