Question

Does industry supply curve slope upward in the long run? explain.

Answer 1

In the paradigm of perfect competition, economic gains and losses play a crucial role. In a particular industry, the presence of economic gains attracts new companies to the business in the long run. The supply curve shifts to the right as new firms enter, prices fall, and profits fall. When economic profits fall to zero, companies continue to enter the industry. When companies suffer economic losses in a sector, some will leave. The supply curve is shifting to the left, raising prices and reducing losses. Organizations continue to leave until the remaining companies no longer suffer losses until there is no economic gain.

Suppose the economy has two industries, and Industry A firms earn economic profits. Through default, Industry A firms earn more than the return available in Industry B. This ensures that Industry B firms gain less than they could receive in Industry A. Industry B firms incur economic losses.Because of quick entry and exit, many companies in Industry B will leave and join Industry A to gain the larger profits there. In doing so, Industry B's supply curve would shift to the left, thus increasing prices and profits. As former companies of Industry B enter Industry A, Industry supply curve

Industry A's supply curve will shift to the right, reducing A's profits. Companies leaving Industry B and entering A will continue the process until companies in both industries earn zero economic profit. This suggests an important long-term outcome: in a system of perfectly competitive markets, economic profits in all industries will be driven to zero in the long run. The behavior of production costs as firms in an industry expand or reduce their output has important implications for the long-run industry supply curve, a curve that relates the price of a good or service to the quantity produced after all long-run adjustments to a price change have been completed. Therefore, any point on a long-run supply curve indicates a supplied cost and quantity at which companies in the industry gain zero economic profit. Unlike the short-run supply curve of the market, the long-run supply curve of the sector does not carry unchanged variable costs and the number of companies.