Decreasing cost industry

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Definition

The industry for a commodity (good or service) is termed a decreasing cost industry if the long-run supply curve of the commodity is downward-sloping. In other words, an increase in the quantity produced leads to a decrease in the price per unit.

Note that the decreasing cost may well be only a long-run phenomenon, i.e., the short-run supply curve may still be upward-sloping.

Possible explanations for decreasing costs

High fixed costs

For many industries, a large fraction of the costs may be fixed costs, which do no escalate with increasing production.

This may be the case for knowledge goods such as commercial software and books, but it may also be the case for knowledge-intensive goods where investments in production techniques, tools and know-how is a large cost component.

Large investments in technology

In some cases, an increase in demand means more capital that allows for greater investments in technological progress that helps bring down the cost of production. Note that in this case, there is a time-dependence: while an initial increase in demand leads to more investment that leads to lower costs of production, a subsequent reduction in demand may not lead to the costs reverting to earlier levels.

Greater competition

In some cases, a larger market to be served may cause a larger number of competing firms to enter the market, lowering costs due to competition.