When an industry is described as a decreasing-cost, increasing-cost, or constant-cost industry, the “cost” that is being referred to is
options:
marginal cost.
average total cost.
average variable cost.
sunk cost.
fixed cost.
The correct answer and explanation is:
The correct answer is average total cost.
In economics, when industries are described as decreasing-cost, increasing-cost, or constant-cost industries, they refer to how the overall cost structure of the industry changes as the industry expands. Specifically, the “cost” being referred to in these descriptions is average total cost (ATC).
- Decreasing-cost industries are those where the average total cost decreases as the industry produces more output. This often occurs due to economies of scale, where firms are able to reduce their per-unit costs as production increases. For example, as more firms enter the industry, the supply of inputs might increase, and suppliers may offer lower prices, reducing the average cost.
- Increasing-cost industries are those where the average total cost increases as the industry expands. This typically happens when resources become scarcer as more firms enter the market, leading to higher input costs. An example is an industry that requires specific raw materials that become harder to obtain as demand for them increases.
- Constant-cost industries are those where the average total cost remains constant as the industry grows. This happens when the industry is able to obtain inputs at constant prices, regardless of the level of production or the number of firms in the market.
The average total cost represents the total cost of production per unit of output, which includes both fixed and variable costs. The other options (marginal cost, average variable cost, sunk cost, and fixed cost) refer to different types of costs, but none of these directly capture the overall cost behavior of an entire industry in the context of expansion. The use of average total cost allows economists to assess the industry’s response to changes in supply and demand.