The increasing-cost industry refers to industries that experience an increase in average costs when expanding (output increases). Or in other words, the industry is at external diseconomies of scale.
Companies enter the industry in search of economic profits. When the industry’s output grows, it increases the demand for resources. The increased demand drives up the resources price, making the input costs of production of all companies in the industry go up.
Implications and examples of increasing-cost industry
The industry’s long-term supply curve is upward sloping. That’s because the long-run average cost curve of each company shifts upward as industrial output rises.
The supply curve will be relatively steep if average costs increase rapidly as the industry grows. With average costs rising rapidly, relatively significant price increases are needed to eager companies to produce more output.
The mining industry, such as petroleum, gas, and coal, is an example. Long-term demand growth results in higher prices due to increased energy production costs. Because the industry faces higher production costs, companies will charge higher prices for their output.
