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: a. Upward sloping. b. Downward sloping. c. Horizontal. d. U-shaped.

Short answer

b. Downward sloping.

Step-by-step solution

Understanding the Cost and Output Relationship

The problem states that as the output of mobile phones increases, the cost of components decreases. This relationship indicates economies of scale, meaning the cost of producing each additional unit decreases as more units are produced.

Applying Pure Competition Characteristics

In a purely competitive market, firms are price takers and the market price is determined by supply and demand. In the long run, firms earn zero economic profit, meaning they produce at the lowest possible cost per unit.

Assessing the Long-Run Supply Curve

Given the decrease in component costs with increased output, firms experience lower production costs, allowing the supply to increase without a rise in price. This creates a situation where the long-run supply curve is downward sloping, as the industry can supply more at a lower cost.

Choosing the Correct Answer

From the analysis, the long-run supply curve in a purely competitive market with decreasing component costs due to increased output is downward sloping. Therefore, the correct choice is b. Downward sloping.

Key concepts

Pure Competition

In a purely competitive market, numerous small firms exist, each producing an identical product. These firms act as price takers, meaning they have no power to influence the product's market price. The price is solely determined by the overall dynamics of market supply and demand. Firms can enter and exit the market with relative ease, which keeps the market highly competitive.

Some main characteristics of pure competition include:

• No single firm can affect the market price significantly
• Products offered are homogeneous
• Firms are free to enter or leave the market
• Consumers have perfect knowledge of prices and products

In such a setting, competition ensures that resources are allocated efficiently, and firms produce their goods at the lowest possible cost.

Long-Run Supply Curve

A long-run supply curve represents how the total supply output of an industry behaves in relation to changes in price over an extended period. In pure competition, prices adjust to keep firms operating at the minimum cost possible while achieving zero economic profit. This means that in the long-term, a firm earns enough just to cover its opportunity costs, without any excess profits.

When economies of scale are present, the long-run supply curve might slope downward. As firms increase production, they can achieve lower costs per unit due to more efficient use of resources and bulk purchasing of inputs. In the mobile phone industry example, if component prices decrease with increased production, the supply curve is expected to slope downward because more units can be supplied at reduced costs, making it cheaper over time to produce each additional mobile phone.

Cost of Production

The cost of production is critical in understanding how competitive markets and supply curves behave. It refers to all expenses incurred in creating a product, including raw materials, labor, and overhead costs. Firms aim to minimize these costs to maximize efficiency and maintain competitive pricing.

When a firm can reduce costs through economies of scale, it gains a significant competitive advantage. These savings can stem from:

• Bulk purchasing of materials at discounted rates
• Advanced production technologies
• Streamlined operations that cut down on waste

In the realm of mobile phones, if component costs like touch screens decrease as production ramps up, the overall production cost per unit declines. This not only benefits the individual firms but also affects the market supply by shifting the supply curve downward.