Suggested languages for you:

Americas

Europe

|
|

# Constant Cost Industry

Lerne mit deinen Freunden und bleibe auf dem richtigen Kurs mit deinen persönlichen Lernstatistiken

Nie wieder prokastinieren mit unseren Lernerinnerungen.

Assume you manage a company that manufactures and sells wooden jewelry on the domestic market. With time, the demand for wooden jewelry grows, and you begin to make huge profits. You decide to expand your firm because you believe you will be able to earn more profit. Or will you? Several other factors are influencing the industry as market conditions change. The answer will depend on whether your company operates in an increasing, decreasing, or constant cost industry. To find out more, let's get straight into the article!

## Constant Cost Industry Definition

Before we get into the constant cost industry, let's have a quick look at the industry's long-run supply curve. In the long run, the market price fluctuates, which causes various companies to enter and exit the market. Due to this reason, it is hard to determine the shape of the long-run supply curve.

The shape of the long-run supply curve depends on the associated cost of production with the expansion of the market or entry and exit of firms. The long-run supply curve is the graph that helps us depict the information about the industry and the behavior of cost in that industry. There are three types of long-run supply curves, depending on the behavior of the cost of production in the industry.

• Types of industries depending on their long-run supply curves:1. Constant Cost Industry;2. Increasing Cost Industry;3. Decreasing Cost Industry.

The long run is a certain period when all of the costs and prices of factors of production fluctuate.

Now, Let's get straight into the constant cost industry.

We know that the entry of new firms affects the cost of production in the long run. However, there are certain instances where the entry of new firms does not affect the costs associated with the production of the overall industry. This type of industry is known as a constant cost industry. The industry's long-run supply curve is a flat horizontal line.

The perfectly competitive industry where the entry of new firms does not affect its overall cost of production is known as a constant cost industry.

Some of the examples of constant cost industry are:

1. Stationery Industry;

2. Internet Service Industry.

### Causes of Constant Cost Industry

Now that we know a bit more about the constant cost industry, let us learn about the causes of the constant cost industry.

• The primary reason for the constant cost is that industry demand for the accompanying raw materials is much lower than the overall demand for these raw materials.

The constant cost industry is the industry where the cost of production does not change with the change in output of the overall industry. The major cause behind the constant cost is that the industry demand for the associated raw materials is significantly lower than the overall demand for these raw materials.

## Constant Cost Industry Example

Now, let us look at an example of a constant-cost industry in a perfectly competitive market.

Let us suppose that Thomas owns the stationery industry and specializes in manufacturing notebooks. In the long run, the profit of the overall industry started to increase and many other manufacturers started to enter the industry. As the number of manufacturers increased, the demand for paper-producing wood also increased.

Other sectors, such as furniture and those that specialize in the construction of wooden buildings, have a higher demand for wood. However, as compared to other industries, the need for the amount of wood required to generate wood pulp in the paper-making business is substantially lower. As a result, even if the number of manufacturers increases, there is no price difference when Thomas purchases wood.

Therefore, as the price of wood does not increase, the cost of production for Thomas remains constant.

## Constant Cost Industry Elasticity

Now let's dive deeper into the concept of elasticity in the constant cost industry.

Fig. 1 - Constant Cost Industry Elasticity

In Figure 1, the long-run supply curve is denoted as LRSC. In the long run, the supply curve in a constant cost industry is a flat horizontal line which depicts that a constant cost industry's supply curve is perfectly elastic.

Changes in the factors of production in the long-run

In the long run, numerous changes in production factors occur. Furthermore, many companies enter and exit the market, causing considerable fluctuations in industry supply. Since long-run production factors are varied, supply is more elastic in the long run than in the short run.

To learn more, don't forget to check out our articles on:- Long Run Supply Curve;- Short Run Supply Curve.

## Constant Cost Industry Supply Curve

Now, Let us have a look at the graph of the constant cost industry in a perfectly competitive industry to understand how firms react to the changes in the industry.

Fig. 2 - Constant Cost Industry Supply Curve

We know that the long-run supply curve of the constant cost industry in a perfectly competitive market is horizontal from which we can deduce that the constant cost industry's supply curve is perfectly elastic. In Figure 2 above, the diagram on the left represents the output of a firm, whereas the diagram on the right represents the output of the overall industry.

Let us first assume that the entire industry is generating quantity Q1 for $P1. The demand for the product or service provided by the industry increases as a result of changing market conditions. The demand curve shifts from D1 to D2, causing the price to rise from$P1 to $P2. Because of the price increase, existing businesses attempt to improve profits by creating additional output. Following the increase in industry prices, the individual firm changes its output from Q1 to Q2. This profit will entice new firms to enter the market while existing ones will seek to expand their operations. The supply curve shifts to the right from S1 to S2 as a result of new entrants into the market and increasing operations by existing firms. As the rise in industrial output does not affect input prices, new entry occurs until the initial price of$P1 is attained. This, ultimately, increases the quantity of production of the overall industry at the constant input price.

## Constant Cost vs Increasing Cost Industry

Let's get into the concept of the increasing cost industry and learn how it differs from the constant cost industry.

• Constant Cost vs Increasing Cost Industry Constant Cost Industry Increasing Cost Industry 1. Horizontal long-run supply curve 1. The upward-sloping long-run supply curve 2. Production cost remains constant in the long run even if the industry expands. 2. Production cost increases in the long run with the expansion of the industry. 3. Perfectly elastic supply curve 3. The supply curve is not perfectly elastic

Fig. 3 - Constant Cost vs Increasing Cost Industry

Figure 3 above depicts a constant cost vs increasing cost industry in a perfectly competitive market. The manufacturing cost in the constant cost industry remains constant at P1 over a long time horizon. The price of a constant cost industry remains constant at $P1 over a long time horizon. However, it is not the case in the increasing-cost industry. In an increasing-cost industry production costs rise over time as the market expands. Figure 3 shows that in the increasing-cost industry, the beginning cost of production is P1, but the cost has escalated to P3 in the long term. Figure 3 shows that in the increasing cost industry the price is initially at$P1, but it has escalated to \$P3 in the long run. As a result, the supply curve of the increasing cost industry is sloping upward.

Fig. 4 - Increasing, Decreasing, and Constant Cost Industry.

Likewise, there is another type of perfectly competitive industry known as decreasing cost industry. In a decreasing-cost industry, production cost decreases in the long run. As a result, the supply curve of the decreasing cost industry is downward-sloping.

The perfectly competitive industry in which the manufacturing cost decreases with the expansion of the market, in the long run, is known as the decreasing cost industry.

The perfectly competitive industry in which the manufacturing cost increases with the expansion of the market, in the long run, is known as the increasing cost industry.

To gain comprehensive insights into the increasing cost industry,check out our article: Increasing Cost Industry!

## Constant Cost Industry - Key Takeaways

• The industry where the entry of new firms does not affect its overall cost of production, in the long run, is known as a constant cost industry.
• The major cause behind the constant cost is that the industry demand for the associated raw materials is significantly lower than the overall demand for these raw materials.
• In the long run, the supply curve in a constant cost industry is a flat horizontal line which depicts that, a constant cost industry's supply curve is perfectly elastic.
• The long-run supply curve is more elastic than the short-run supply curve.
• The industry in which the manufacturing cost increases with the expansion of the market, in the long run, is known as the increasing cost industry.

In a constant-cost industry production cost remains constant in the long run even if the industry expands. Whereas, production cost increases with the expansion of industry in the increasing cost industry.

The major cause behind the constant cost is that the industry demand for the associated raw materials is significantly lower than the overall demand for these raw materials.

When demand in the constant-cost industry increases existing businesses attempt to improve profits by creating additional output. Those profits will attract new firms to enter the industry.

The cost of production in an industry that does not increase with industry expansion is known as constant cost in economics.

A good example of a constant-cost industry is the stationery product manufacturing industry, because the industry demand for the associated raw materials (wood) is significantly lower than the overall demand for these raw materials.

The long-run supply curve is perfectly elastic (horizontal) in a constant cost industry.

## Constant Cost Industry Quiz - Teste dein Wissen

Question

What is a constant cost industry?

The perfectly competitive industry where the entry of new firms does not affect its overall cost of production is known as a constant cost industry.

Show question

Question

What are the examples of the constant cost industry?

Stationery Industry and Internet Service Industry

Show question

Question

What is the primary cause of the constant cost industry?

The primary reason for the constant cost is that industry demand for the accompanying raw materials is much lower than the overall demand for these raw materials.

Show question

Question

In the long run, the supply curve in a constant cost industry is ____________

Perfectly Elastic.

Show question

Question

Supply is more elastic in the long run than in the short-run.

True.

Show question

Question

The rise in industrial output does not affect input prices in the constant-cost industry.

True.

Show question

Question

The constant cost industry has a perfectly inelastic supply curve.

False

Show question

Question

What is an increasing cost industry?

The perfectly competitive industry in which the manufacturing cost increases with the expansion of the market, in the long run, is known as the increasing cost industry.

Show question

Question

There are numerous changes in the factors of production in the long run.

True

Show question

Question

In the long run, which type of industry demand for raw materials is significantly lower than the overall demand for raw materials?

Decreasing Cost Industry.

Show question

Question

What is the difference between a constant-cost industry and an increasing-cost industry?

In a constant-cost industry, production cost remains constant in the long run even if the industry expands. Whereas, production cost increases with the expansion of industry in the increasing cost industry.

Show question

60%

of the users don't pass the Constant Cost Industry quiz! Will you pass the quiz?

Start Quiz

## Study Plan

Be perfectly prepared on time with an individual plan.

## Quizzes

Test your knowledge with gamified quizzes.

## Flashcards

Create and find flashcards in record time.

## Notes

Create beautiful notes faster than ever before.

## Study Sets

Have all your study materials in one place.

## Documents

Upload unlimited documents and save them online.

## Study Analytics

Identify your study strength and weaknesses.

## Weekly Goals

Set individual study goals and earn points reaching them.

## Smart Reminders

Stop procrastinating with our study reminders.

## Rewards

Earn points, unlock badges and level up while studying.

## Magic Marker

Create flashcards in notes completely automatically.

## Smart Formatting

Create the most beautiful study materials using our templates.