Example 8.6 Constant-, Increasing-, and Decreasing-Cost Industries: Coffee,

Example 8.6 Constant-, Increasing-, and Decreasing-Cost Industries: Coffee, Oil, and Automobiles In the very short-run, supply is completely inelastic. The price increases sharply. In the intermediate run, supply and demand are more elastic. There is small increase in price and supply curve shifts to the left. In the long-run, price returns to its normal price because farmers can react in this period. The long-run supply curve, then simply reflects the cost of producing coffee, Including the cost of land, of planting and caring for the trees.( it is widely available and these costs remain constant as the volume of coffee produced grows.)

Increasing-cost industry The oil industry is an increasing cost industry with an upward-sloping long-run supply curve. Costs are increasing, because there is a limited availability of easily accessible, large volume oil fields. Therefore, as oil companies increase output, they are forced to obtain oil from increasingly expensive fields.

Decreasing – cost industry In the automobile industry, there are certain cost advantages, because we can take inputs more cheaply as the volume of the production increases. Major automobile manufacturers such as General Motors, Toyota, Ford etc – acquire inputs from firms that specialize in producing those inputs efficiently. AC decreases as the volume of production increases .