The decreasing-cost industry refers to industries that experience a decrease in average costs when they grow bigger. Or, in other words, the industry experiences external economies of scale.
The industry’s long-term supply curve is downward sloping. That’s because the average long-term cost curve of each company shifts downward as industrial output rises.
Reasons for decreasing-cost industry
An increased number of companies will reduce costs for all companies. Capital investment in sophisticated technology is likely to benefit them when demand begins to increase. An increase in demand ultimately leads to increased productivity and lower costs.
Cost reduction also occurs when the company’s input suppliers can move closer to the industry leader. That way, transportation costs will be cheaper.
Examples of cost reduction industries include semiconductors and personal computers, where increased demand has led to much lower prices.
