Decreasing cost industry
| Decreasing cost industry |
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The term of decreasing cost industry determines average total costs (unit costs) which increase as output decreases and decrease when output increases in the situation when firms exit and enter the industry properly. If market demand increases for the good produced by businesses in a decreasing cost industry so the price will inceptively rise and later will eventually fall to a level below it is the original level. The decreasing cost industry is described by a downward-sloping long-run supply curve.
During entering new firms with a decreasing cost industry so the input prices fall as output expands. The industry of a decreasing-cost is an industry where the expansion of industry output decreases the firm's cost curves by the entry of new firms. For example, when the production of electronic components expands so the price of computer chips might be lower. One of the reason might be that[1]:
- major sales volume receive the suppliers to reach economies of scale and
- inferior their input prices to businesses in the electronic component industry.
Decreasing cost industries are usually subsidized or regulated therefore allowing for a diversity of solutions to their pricing dilemma. Dams and waterways frequently charge a low or even zero price to provide wide use of the product, with taxes constituting the difference between revenues and costs. Moreover, electric utilities price their power under a diversity of regulatory strategies, frequently charging different rates for the same product to different customers. Through such price discrimination, there is achieved to the decreasing-cost industry a second-best solution. The total cost of production is reclaimed from those customers who are willing to pay the highest prices. Through charging other customers less (even as little as the marginal cost of produce), is guaranteed the wide social benefits. In consequence, the logic of economics suggests that in the production of raw data by faraway sensing is an effective solution for price discrimination. However, the logic of international relations contends against price discrimination. In consequence, the Land Remote Sensing Act requires to have from all the parties access to data on equal terms[2].
Increasing cost industry
Countertype is increasing cost industry which determines an industry where the average total costs increase as output increases and also decrease as output decreases when business exit and enter the industry properly [3].
Examples of Decreasing cost industry
- Electricity and Renewable Energy: Many parts of the electricity industry have experienced dramatic cost reductions as technology has improved and economies of scale have been achieved. Wind and solar energy, in particular, have become increasingly cost-competitive with traditional sources of electricity. Further technological advances, as well as greater economies of scale, are expected to continue to drive down the cost of renewable energy sources.
- Information Technology: The IT industry has seen significant cost reductions in recent years due to advances in technology and increased competition. This has allowed businesses to purchase hardware and software at much lower costs than in the past.
- Pharmaceuticals: The cost of producing pharmaceuticals has decreased significantly over the past few decades due to advances in technology and increased competition. This has allowed pharmaceutical companies to produce drugs at much lower costs than in the past.
Advantages of Decreasing cost industry
The advantages of a decreasing cost industry include:
- Increased competition in the market which helps drive down prices, allowing consumers to benefit from lower prices for products and services.
- Greater efficiency of production due to the improved technology and production processes which lead to lower costs and improved quality.
- Lower barriers to market entry, allowing more firms to enter the market and make it more competitive.
- More opportunities for innovation and creative problem solving, allowing firms to find new ways of producing goods and services.
- Increased economies of scale, allowing firms to produce more goods and services at lower costs.
- Improved resource allocation, as firms become better able to allocate resources to the most efficient uses.
Limitations of Decreasing cost industry
- One of the main limitations of a decreasing cost industry is that it creates a dynamic market that requires firms to constantly adjust to changing conditions. This can be difficult to do, especially for smaller firms.
- Another limitation is that it can be difficult to predict the long-term effects of changes in the industry. As firms enter and exit, the market can shift rapidly, making it challenging for firms to plan for the future.
- Additionally, with increasing competition, firms may be tempted to cut costs and reduce quality to remain competitive. This can have a damaging effect on the industry as a whole, leading to lower quality products and services.
- Lastly, decreasing cost industries can be difficult to regulate due to the ever-shifting nature of the market. Government policies may not be able to keep up with the pace of change, leading to ineffective or outdated regulations.
Introduction: Other than the definition of decreasing cost industry, there are several approaches to understanding and utilizing the concept of decreasing cost industry:
- Production costs approach: This approach looks at the cost of production, which is the cost of the inputs required for the production of the good. As technology or other inputs become cheaper over time, production costs decrease and this can lead to a decrease in the cost of the good.
- Economies of scale approach: This approach looks at how production costs decrease as the scale of production increases. As the scale of production increases, businesses are able to take advantage of economies of scale, which allows them to spread out their fixed costs over a larger output, resulting in lower unit costs.
- Price competition approach: This approach looks at how firms compete with each other to lower their prices. Price competition between firms can lead to a decrease in the price of the good, as firms try to outcompete each other.
- Market structure approach:This approach looks at the structure of the market. Depending on the structure of the market, firms may have the ability to decrease prices in order to increase demand for their product.
Summary: In conclusion, there are several approaches to understanding and utilizing the concept of decreasing cost industry, such as the production costs approach, economies of scale approach, price competition approach, and market structure approach. By understanding these approaches, businesses can take advantage of decreasing costs in order to increase their profits.
Footnotes
References
- Arnold R.A. (2007)., Economics, Cengage Learning
- Hartley K. (2014)., The Political Economy of Aerospace Industries: A Key Driver of Growth and International Competitiveness'', Edward Elgar Publishing
- Layton A.P., Robinson T.J.C., Tucker I.B. (2011)., Economics for Today, Cengage Learning
- Reischauer R.D. (1993)., Encouraging Private Investment in Space Activities, Diane Publishing
Author: Agnieszka Piwowarczyk
