Answer Key Illustrate and explain the derivation of the long-run supply curve for an increasing cost industry. Note each of the steps in the derivation. Suppose that there is an increase in demand. In the short-run, the increase in demand will cuase prices to rise.
Higher prices lead to profits.
Profit attract entry and the supply increases. In an increasing cost industry, entry pushes resource prices up. Higher resource prices cause the cost curves to shift upward. The industry attains a new equilibrium when the falling price and rising costs eliminate economic profits. In the long-run, the price will have to rise to allow firms to cover the higher costs of producing greater output.