Question

Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be: \(L O 11.3\) a. Upward sloping. b. Downward sloping. c. Horizontal. d. U-shaped.

Short answer

b. Downward sloping.

Step-by-step solution

Understanding the Market Type

We are told that the mobile phone industry features pure competition. In a perfectly competitive market, firms are price takers, and each firm's supply is influenced by market prices and costs of production.

Analyzing Cost of Production

As the output of mobile phones increases, the costs of touch screens and other components decrease. This implies that companies can produce at a lower cost as production scales up.

Effect on Long-Run Supply Curve

In a perfectly competitive market with decreasing costs for components, the market can supply more at the same price, or for a higher output, the price can even reduce. This suggests that the long-run supply curve will be downward sloping as firms benefit from economies of scale.

Key concepts

Pure Competition

In economics, pure competition refers to a market structure where numerous firms compete against each other, but none can control the market price. It's a scenario where each firm in the market produces a homogenous product, and there are no barriers to entry or exit.

Key characteristics of pure competition include:

• Numerous small firms: No single firm can influence the market price.
• Homogenous products: All firms sell identical products.
• Free entry and exit: Firms can easily enter or exit the market.
• Perfect knowledge: All buyers and sellers have complete information about prices and products.
• Independent decision-making: Each firm’s output decision does not affect the market.

In such markets, firms are considered price takers. This means that they must accept the equilibrium price in the market, as set by the forces of demand and supply. Understanding pure competition provides a foundation for analyzing how markets allocate resources efficiently. It's essential for understanding the behavior of firms in scenarios where competitive market conditions prevail.

Long-Run Supply Curve

The long-run supply curve is an essential concept in understanding how markets adjust over time. It represents the relationship between the price of a good and the total output supplied by all firms in the industry in the long run, after all inputs have been adjusted.

In a perfectly competitive market, the long-run supply curve can take different shapes depending on the industry. For instance:

• Horizontal: This suggests constant costs of production as outputs change, common in industries where input prices don't vary with the industry's output level.
• Upward Sloping: Indicates increasing production costs as industry output rises, often due to limited resources.
• Downward Sloping: Associated with decreasing production costs as output increases, usually when economies of scale are present.

In the context of the mobile phone industry, where component costs decrease with increased output, the long-run supply curve becomes downward sloping. This implies that the more firms produce, the lower the costs become, promoting increased supply at lower prices to the consumer.

Economies of Scale

Economies of scale occur when increasing the scale of production leads to a lower cost per unit of output. This concept is vital in understanding why some firms can gain a competitive advantage by growing larger.

There are several ways through which economies of scale can be achieved:

• Technical Economies: Utilizing advanced technology to increase production efficiency.
• Purchasing Economies: Buying inputs in bulk at reduced prices.
• Managerial Economies: Hiring specialized managers to increase operational efficiency.
• Financial Economies: Accessing loans at lower interest rates due to better creditworthiness.

In industries such as mobile phones, as production scales up and demand for components rises, suppliers might reduce prices due to bulk purchasing and improved efficiencies. This results in lower costs for producing each additional unit, contributing to a downward sloping long-run supply curve. Understanding economies of scale helps explain why larger firms might have a competitive edge in cost structure, which can lead to changes in the industry's dynamics.