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Supply Curve
External economies and diseconomies are those which are realized by all firms in an industry as a result of the expansion of the industry as a whole. The creation of external economies by an expanding industry will shift the cost curves of the firms downward. On the other hand, the creation of external diseconomies will shift the cost curves of the firms downward. Whether a given industry will experience upward or downward shift in the cost curves depends upon the net or combined effect of the external economies outweigh the external diseconomies, so that there are net external economies cost curves of the firms will shift downward. On the other hand, if with the expansion of an industry external diseconomies are stronger that the external economies so that there are net external diseconomies, cost curves of the firms will shift upward.

Further as the industry expands, trade journals may appear which help in discovering and spreading technical knowledge. Again, with the growth of an industry some specialized firms may come into existence which work up its waste products. The industry can then sell them at good price. There is every possibility of external economies to be reaped when a young industry grows in a view territory.

When a well established and good sized industry expands further, it may experience external diseconomies. As more firms enter the industry, competition among them may push up the prices of scarce raw materials, skilled labour and other specialized inputs. Moreover, the additional units of productive inputs being obtained by the industry may be less efficient then the precious ones. All these external diseconomies will raise the average and marginal cost curves of the firms. To quote Professor Heilbrone again, “industries may also experience long run rising costs if their expansion pushes them up against factor scarcity of a stubbornly inelastic kind. Extractive agricultural industries may be forced to use progressively less fertile or less conveniently located land. Such industries would experience a gradual rise in unit costs as their output is increased.

It follows from above that the quantity supplied by an industry in the long run will be determined by the optimum output of a firm in the long run multiplied by the number of firms in the industry at that price. With the change in the price of the product following a change in demand conditions, the number of firms of external economies and  diseconomies. As a result, the quantity supplied by the industry will change at a new price. The long run supply curve of the industry may either be sloping upward or be a horizontal straight line, or be sloping downward depending upon whether the industry in question is increasing cost, constant cost, or decreasing cost. How the long run supply curve of a perfectly competitive industry is explained by the industry’s equilibrium.

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