We understand cost curves and entry and entry/exit decisions. Now we are going to explore how each firm’s decisions influence the supply curve. Here’s the key question: As industry output increases, what happens to costs? We look at three options: an increasing cost industry, a constant cost industry, and a decreasing cost industry.
First up, we look at oil as an example of an increasing cost industry. One oil company drills for oil that is close to the surface, and the second company drills for oil deep underground. Other examples of increasing cost industries include copper, gold, and silver, coffee, and even the profession of nuclear engineers.
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