Long Run Supply Curve

The Long Run Supply Curve in Perfect Competition

Now, let us look at the long-run supply curve in perfect competition.

In a perfectly competitive market, there are three types of industries depending on the long-run supply curve.

The three types of industries are:

1. Increasing cost industry;
2. Decreasing cost industry;
3. Constant cost industry.

Fig. 1 - The long-run supply curve in perfect competition

Long-run supply curves in a perfectly competitive market are determined by the industry's price. If the price rises as the industry expands, it is referred to as an increasing cost industry in a perfectly competitive market. Similarly, a constant cost industry is one in which the price remains constant during a long period of industry expansion. Finally, a decreasing-cost industry is one in which the price drops over time as the industry expands.

• The three types of industries in long run perfectly competitive market are:

  - Increasing cost industry;

  - Decreasing cost industry;

  - Constant cost industry.

The Long Run Market Supply Curve

Now, let us understand the concept of the long-run market supply curve assuming an industry with a constant cost.

Fig. 2 - The long-run market supply curve

In Figure 2, the diagram on the left shows a firm's output, while the diagram on the right represents the output of the entire industry.

Initially, the overall market is in equilibrium at point A, with the price level at P₁ and output at Q₁. Because of changing market conditions, demand for the product rises, causing the demand curve D₁ to move to the right to D₂. As demand rises, firms in the industry raise their prices to P₂. This change in the individual firms' prices causes the whole industry's price to rise from P₁ to P₂. The industry is now producing a Q₂ quantity of output at the new equilibrium at point B.

Attracted by higher profit margins, other firms get an incentive to enter the market. As a result of the entry of new firms, the supply curve shifts from S₁ to S₂. Since an increase in industrial output does not affect input prices, new entry occurs until the initial price P₁ is reached, forming a new equilibrium C. This raises the entire industry's output to Q₃ at a constant input price (P₁). Hence, LRSC is the long-run supply curve of an industry with a constant cost.

Long Run Supply Curve: Decreasing Cost Industry

Now, let's learn about the long-run supply curve in a decreasing-cost industry.

The industry in which the production cost decreases, in the long run, is known as decreasing cost industry. The slope of the decreasing-cost industry is downward-sloping. Let us look at the example to understand the concept clearly.

Short Run vs Long Run Supply Curve

Now, let us look at the difference between the short-run and long-run supply curves.

In the short run, it is very tough for a company to cover all of its costs (variable and fixed costs) that are incurred during its operation. The company is not able to cover such a sum of money and make a business profitable in the short run. So, in the short run, the main motive of the company is to cover all of the variable expenses and continue to run the business until they become profitable in long run. So, we can say that a firm in the short run needs to adjust its variable costs to remain in business.

Now, let's see how the short-run supply curve of a firm compares to the long-run supply curve.

The decisions taken by a firm are very different in the short run and the long run. Unlike the short run, the long run is a period where many firms enter and exit the market and all of the firm's input acts as a variable cost (even the fixed costs). In the short run, the motive of a firm is to cover its variable cost with the earned revenue whereas, in the long run, a firm tries to make a substantial profit.

• Short-run	Long-run
  1. One or more production input is fixed.	1. All of the production input is variable.
  2. The firm tries to cover its variable cost.	2. The firm tries to maximize its profits.