Transcript Chapter 8 - Perfect Competition

Chapter 8
Perfect
Competition
© 2004 Thomson Learning/South-Western
Timing of a Supply Response


A supply response is the change in quantity
of output in response to a change in demand
conditions.
The pattern of equilibrium prices will be
different depending upon the time period
–
2
In the very short run, quantity is fixed so there is no
supply response
Timing of a Supply Response
–
–
3
In the short run existing firms may change
the quantity they are supplying, but no
firms enter or exit the market.
In the long run firms can further change
the quantity supplied and new firms may
enter the market.
Pricing in the Very Short Run



4
The market period (very short run) is a short
period of time during which quantity supplied is
fixed.
In this period, price acts to ration demand as it
adjusts to clear the market.
This situation is illustrated in Figure 8.1 where
supply is fixed at Q*.
FIGURE 8.1: Pricing in the Very
Short Run
Price
S
P1
D
0
5
Q*
Quantity
per week
Pricing in the Very Short Run


6
When demand is represented by the curve D,
P1 is the equilibrium price.
The equilibrium price is the price at which the
quantity demanded by buyers of a good is
equal to the quantity supplied by sellers of the
good.
Shifts in Demand: Price as a
Rationing Device


7
If demand were to increase, as illustrated by
the new demand curve D’ in Figure 8.1, P1 is
no longer the equilibrium price since the
quantity demanded exceeds the quantity
supplied.
The new equilibrium price is now P2 where
price has rationed the good to those who value
it the most.
FIGURE 8.1: Pricing in the Very
Short Run
Price
S
P2
P1
D’
D
0
8
Q*
Quantity
per week
APPLICATION 8.1: Internet Auctions



9
Auctions on the internet have rapidly become one of
the most popular ways of selling all manner of goods.
There is a sense that internet auctions resemble the
theoretical situation illustrated in Figure 8.1…the goods
are in fixed supply and will be sold for whatever
bidders are willing to pay.
However, this view of things may be too simple
because it ignores dynamic elements which may be
present in suppliers’ decisions.
APPLICATION 8.1: Internet Auctions



10
A quick examination of internet auction sites suggests
that operators employ a variety of features in their
auctions.
“Reserve” prices, bidding history, and “buy it now”
prices are all features offered at various sites.
Attempts to answer the many questions that surround
the returns to operators usually focus on the
uncertainties inherent in the auction process and how
bidders respond to them.
APPLICATION 8.1: Internet Auctions



11
Because buyers and sellers are total strangers in
internet auctions, a number of special provisions have
been developed to mitigate the risks of fraud that the
parties might encounter in such situations.
The primary risk facing bidders is in knowing that the
goods being offered meet expected quality standards.
Previous bidders provide rankings to many of the
auction sites.
APPLICATION 8.1: Internet Auctions


12
For sellers, the primary risk is that they will
not be paid.
Various intermediaries (such as Pay Pal)
have been developed to address this
problem.
Applicability of the Very Short-Run
Model


This model may only apply where the goods
are very perishable.
It is usually assumed that a rise in price will
prompt producers to bring additional quantity to
the market.
–
13
This can result from greater production, or, if the
goods are durable, from existing stock held by
producers.
Short-Run Supply



14
In the short-run the number of firms is fixed as
no firms are able to enter or leave the market.
However, existing firms can adjust their
quantity in response to price changes.
Because of the large number of firms, each
firm is treated as a price taker.
Construction of a Short-Run Supply
Curve



15
The quantity that is supplied is the sum of the
quantities supplied by each firm.
The short-run market supply curve is the
relationship between market price and quantity
supplied of a good in the short run.
In Figure 8.2 it is assumed that there are only
two firms, A and B.
FIGURE 8.2: Short-Run Market
Supply Curve
Price
Price
Price
SA
P
0
qA1
(a) Firm A
16
Output
0
Output
(b) Firm B
0
Quantity
per week
(c) The Market
FIGURE 8.2: Short-Run Market
Supply Curve
Price
Price
Price
SB
SA
P
0
qA1
(a) Firm A
17
Output
0
qB1
Output 0
(b) Firm B
Quantity
per week
(c) The Market
FIGURE 8.2: Short-Run Market
Supply Curve
Price
Price
Price
SB
SA
S
P
0
18
qA1
(a) Firm A
Output
0
qB1
Output 0
(b) Firm B
Q1
Quantity
per week
(c) The Market
Construction of a Short-Run
Supply Curve


Both firm A’s and firm B’s short-run supply
curves (their marginal cost curves) are shown
in Figure 8.2(a) and Figure 8.2(b) respectively.
The market supply curve is the horizontal sum
of the two firms are every price.
–
19
In Figure 8.2(c), Q1 equals the sum of q1A and q1B.
Short-Run Price Determination


20
Figure 8.3 (b) shows the market equilibrium
where the market demand curve D and the
short-run supply curve S intersect at a price of
P1 and quantity Q1.
This equilibrium would persist since what firms
supply at P1 is exactly what people want to buy
at that price.
FIGURE 8.3: Interaction of Many Individuals and Firms
Determine market price in the Short Run
Price
SMC
Price
S
Price
SAC
P1
D
0
q1 q2
Output
(a) Typical Firm
21
0
Q1
Q2 Quantity
per week
(b) The Market
d
0
q1 q 2
q‘1
Quantity
(c) Typical Person
FIGURE 8.3: Interaction of Many Individuals and
Firms Determine market price in the Short Run
Price
SMC
Price
S
Price
SAC
P2
D’
P1
d’
D
0
q1 q2
Output
(a) Typical Firm
22
0
Q1
Q2 Quantity
per week
(b) The Market
d
0
q1 q2
q‘1
Quantity
(c) Typical Person
Functions of the Equilibrium Price

The price serves as a signal to producers
about how much should be produced.
–
–
23
To maximize profit, firms will produce the output
level for which marginal costs equal P1.
This yields an aggregate production of Q1.
Functions of the Equilibrium Price

Given the price, utility maximizing individuals
will decide how much of their limited incomes
to spend
–
–

24
At price P1 the total quantity demanded is Q1.
No other price brings about the balance of quantity
demanded and quantity supplied.
These situations are depicted in Figure 8.3
(a) and (b) for the typical firm and individual,
respectively.
Effect of an Increase in Market
Demand


25
If the typical person’s demand for the good
increases from d to d’, the entire market
demand curve will shift to D’ as shown in figure
8.3.
The new equilibrium is P2, Q2 where a new
balance between demand and supply is
established.
Effect of an Increase in Market
Demand



26
The increase in demand resulted in a higher
equilibrium price, P2 and a greater equilibrium
quantity, Q2.
P2 has rationed the typical person’s demand so
that only q2 is demanded rather than the q’1
that would have been demanded at P1.
P2 also signals the typical firm to increase
production from q1 to q2.
Shifts in Demand Curves

Demand will increase, shift outward, because
–
–
–
–
27
Income increases
The price of a substitute rises
The price of a complement falls
Preferences for the good increase
Shifts in Demand Curves

Demand will decrease, shift inward, because
–
–
–
–
28
Income falls
The price of a substitute falls
The price of a complement rises
Preferences for the good diminish
Shifts in Supply Curves

Supply will increase, shift outward, because
–
–

Supply will decrease, shift inward, because
–
29
Input prices fall
Technology improves
Input prices rise
Table 8.1: Reasons for a Shift in a
Demand or Supply Curve
Demand
30
Supply
Shifts outward () because
 Income increases
 Price of substitute rises
 Price of complement falls
 Preferences for good increase
Shifts outward () because
 Input prices fall
 Technology improves
Shifts inward () because
 Income falls
 Price of substitute falls
 Price of complement rises
 Preferences for good diminish
Shifts inward () because
 Input prices rise
Short-Run Supply Elasticity

The short-run elasticity of supply is the
percentage change in quantity supplied in the
short run in response to a 1 percent change in
price.
Percentage change in quantity
supplied in short run
Short - run supply elasticity 
. [8.1]
Percentage change in price
31
Short-Run Supply Elasticity


32
If a 1percent increase in price causes firms to
increase quantity supplied by more than 1
percent, supply is elastic.
If a 1 percent increase in price causes firms to
increase quantity supplied by less than 1
percent, supply is inelastic.
Shits in Supply Curves and the Importance of
the Shape of the Demand Curve

The effect of a shift in supply upon equilibrium
levels of P and Q depends upon the shape of
the demand curve.
–
–
33
If demand is elastic, as in Figure 8.4 (a), a
decrease in supply has a small effect on price but
a relatively large effect on quantity.
If demand is inelastic, as in Figure 8.4 (b), the
decrease in supply has a greater effect on price
than on quantity.
FIGURE 8.4: Effect of a Shift in the Short-Run Supply
Curve on the Shape of the Demand Curve
Price
Price
S
P
D
S
P
D
0
Q Quantity
per week
(a) Elastic Demand
34
0
Q
Quantity
per week
(b) Inelastic Demand
FIGURE 8.4: Effect of a Shift in the Short-Run Supply
Curve on the Shape of the Demand Curve
S’
Price
Price
S’
S
S
P’
P’
P
D
P
D
0
Q’
Q Quantity
per week
(a) Elastic Demand
35
0
Q’ Q
Quantity
per week
(b) Inelastic Demand
Shifts in Demand Curves and the Importance
of the Shape of the Supply Curve

The effect of a shift in demand upon
equilibrium levels of P and Q depends upon
the shape of the supply curve.
–
–
36
If supply is inelastic, as in Figure 8.5 (a), the effect
on price is much greater than on quantity.
If the supply curve is elastic, as in Figure 8.5 (b), the
effect on price is relatively smaller than the effect on
quantity.
Figure 8.5: Effect of A shift in the Demand Curve
Depends on the Shape of the Short-Run Supply Curve
S
Price
Price
S
P’
P
P
D
0
Q
Quantity 0
per week
(a) Inelastic Supply
37
D
Q
Quantity
per week
(b) Elastic Supply
Figure 8.5: Effect of A shift in the Demand Curve
Depends on the Shape of the Short-Run Supply Curve
S
Price
Price
S
P’
P
D’
P’
P
D’
D
0
Q Q’
Quantity 0
per week
(a) Inelastic Supply
38
D
Q
Q’
Quantity
per week
(b) Elastic Supply
APPLICATION 8.2: Ethanol Subsidies in the
United States and Brazil



39
Ethanol has potentially desirable properties as
a fuel for automobiles or additive to gasoline
that may reduce air pollution.
Several governments have adopted subsides
to producers of ethanol.
One way to show the effect of a subsidy is to
treat it as a shift in the short-run supply curve
as shown in Figure 1.
APPLICATION 8.2: Figure 1: Ethanol
Subsidies Shift the Supply Curve Price
Price
($/gallon)
S1
P1
D
0
40
Q1
Quantity
(million gallons)
APPLICATION 8.2: Figure 1: Ethanol
Subsidies Shift the Supply Curve Price
Price
($/gallon)
S1
S2
P1
P2
Subsidy
D
0
41
Q1
Q2
Quantity
(million gallons)
APPLICATION 8.2: Ethanol Subsidies in the
United States and Brazil


42
The subsidy shifts out the supply curve (by
about 54 cents-a-gallon in the U.S.) which
results in a quantity demanded increase from
Q1 to Q2.
The total cost of the subsidy depends upon the
per-gallon amount and on the amount of the
increase in quantity demanded.
APPLICATION 8.2: Ethanol Subsidies in the
United States and Brazil



43
In the U.S. it is made from corn, and the
subsidy is primarily found in Iowa where many
major corn producers are located.
In Brazil it is made from sugar cane and was
heavily subsidized until Economic liberalization
in the 1990s.
Due to political pressure from producers, the
subsidy is again being proposed.
A Numerical Illustration


44
Suppose the quantity of
cassette tapes
demanded per week (Q)
depends on the price of
the tapes (P) per
Demand : Q  10  P
equation 8.2,
Suppose short-run
supply is given by
equation 8.3.
Supply : Q  P  2
[8.2]
[8.3]
A Numerical Illustration



45
Figure 8.6 shows the graph for these
equations.
Since the supply curve intersects the vertical
axis at P = 2, this is the shutdown price.
The equilibrium price is $6 with people
demanding 4 tapes which equals the amount
supplied by the firms.
FIGURE 8.6: Demand and Supply
Curves for Cassette Tapes
Price
S
10
6
2
46
0
4
D
10
Tapes
per week
A Numerical Illustration


If the demand increased as reflected in equation
8.4, the former equilibrium price and quantity would
no longer hold.
As shown in Figure 8.6, the new equilibrium price is
$7 where the quantity demanded and supplied of
tapes is 5.
Q  12  P [8.4]
47
FIGURE 8.6: Demand and Supply
Curves for Cassette Tapes
Price
$12
S
10
7
6
5
2
48
0
3456
D D’
10 12
Tapes
per week
A Numerical Illustration



49
Table 8.2 shows the two cases.
After the increase in demand, there is an
excess demand for tapes at the old equilibrium
price of $6.
The increase in price from $6 to $7 restores
equilibrium in the market.
TABLE 8.2: Supply and Demand Equilibrium in the
Market for Cassette Tapes
Supply
Price
$10
9
8
7
6
5
4
3
2
1
0
50
Q=P-2
Quantity Supplied
(Tapes per Week)
8
7
6
5
4
3
2
1
0
0
0
New equilibrium
Demand
Case 1
Case 2
Q = 10 – P
q = 12 – P
Quantity Demanded Quantity Demanded
(Tapes per Week)
(Tapes per Week)
0
2
1
3
2
4
3
5
6
4
5
7
6
8
7
9
8
10
9
11
10
12
Initial equilibrium
The Long Run

Long run supply responses are much more
flexible than in the short run.
–
–
51
Long-run cost curves reflect greater input flexibility.
Firms can enter and exit the market in response to
profit opportunities.
Equilibrium Conditions

In a perfectly competitive equilibrium, no firm
has an incentive to change its behavior.
–
–
52
Firms must be choosing the profit maximizing level
of output.
Firms must be content to stay in or out of the
market.
Profit Maximization

It is assumed that the goal of each firm is to
maximize profits.
–
–
53
Since each firm is a price taker, this implies that
each firm product where price equals long-run
marginal cost.
This equilibrium condition, P = MC determines the
firm’s output choice and its choice of inputs that
minimize their long-run costs.
Entry and Exit

The perfectly competitive model assumes that
firms entail no special costs when they exit and
enter the market.
–
–
54
Firms will be enticed to enter the market when
economic profits are positive.
Firms will leave the market when economic profits
are negative.
Entry and Exit

Entry will cause the short-run market supply
curve to shift outward causing the market
price to fall.
–

55
This will continue until positive economic profits
are no longer available.
Exit causes the short-run market supply curve
to shift inward causing the market price to
increase, eliminating the economic losses.
Long-Run Equilibrium



56
For purposes of this chapter, it is assumed that
all firms producing a particular good have
identical cost curves.
Thus, in the long-run equilibrium all firms earn
zero economic profits.
Firms will produce at minimum average total
costs where P = MC and P = AC.
Long-Run Equilibrium



57
P = MC results from the assumption that firm’s
are profit maximizers.
P = AC results because market forces cause
long run economic profits to equal zero.
In the long run, firm owners will only earn
normal returns on their investments.
Long-Run Supply: The Constant
Cost Case



58
The constant cost case is a market in which
entry or exit has no effect on the cost curves of
firms.
Figure 8.7 demonstrates long-run equilibrium
for the constant cost case.
Figure 8.7 (b) shows that market where the
market demand and supply curves are D and
S, respectively, and equilibrium price is P1.
FIGURE 8.7: Long-Run Equilibrium for a Perfectly
Competitive Constant Market: Cost Case
Price
Price
SMC
MC
S
AC
P
1
D
0
q1
(a) Typical Firm
59
Output 0
Q1
Quantity
per week
(b) Total Market
FIGURE 8.7: Long-Run Equilibrium for a Perfectly
Competitive Constant Market: Cost Case
Price
Price
SMC
MC
S
AC
P2
P
1
D
D
0
q1 q2
(a) Typical Firm
60
Output 0
Q1 Q
2
Quantity
per week
(b) Total Market
FIGURE 8.7: Long-Run Equilibrium for a Perfectly
Competitive Constant Market: Cost Case
Price
Price
SMC
MC
S
AC
S’
P2
LS
P
1
D
D
0
q1 q2
(a) Typical Firm
61
Output
0
Q1 Q2
Q3
Quantity
per week
(b) Total Market
Long-Run Supply: The Constant
Cost Case




62
The typical firm will produce output level q1
which results in Q1 in the market.
The typical firm is maximizing profits since
price is equal to long-run marginal cost.
The typical firm is earning zero economic
profits since price equals long-run average
total costs.
There is no incentive for exit or entry.
A Shift in Demand



63
If demand increases to D’, the short-run price
will increase to P2.
A typical firm will maximize profits by producing
q2 which will result in short-run economic
profits (P2 > AC).
Positive economic profits cause new firms to
enter the market until economic profits again
equal zero.
A Shift in Demand



64
Since costs do no increase with entry, the
typical firm’s costs curves do not change.
The supply curve shifts to S’ where the
equilibrium price returns to P1 and the typical
firm produces q1 again.
The new long-run equilibrium output will be Q3
with more firms in the market.
Long-Run Supply Curve



65
Regardless of the shift in demand, market
forces will cause the equilibrium price to return
to P1 in the long-run.
The long-run supply curve is horizontal at the
low point of the firms long-run average total
cost curves.
This long-run supply curve is labeled LS in
Figure 8.7 (b).
APPLICATION 8.3: Movie Rentals




66
Movies have been available for home rental since the
1920s.
The basic rental business has consistently exhibited
the characteristics of a constant cost industry.
By the end of the 1980s, more than 70% of U.S.
households owned VHS tape players.
At first the rental industry was quite profitable, but there
were no significant barriers to entry.
APPLICATION 8.3: Movie Rentals


67
Because inputs used by the industry (low-wage
workers and simple rental space) were readily
available at market prices, the industry had a
perfectly elastic long-run supply curve – it
could easily meet exploding demand with no
increase in price.
The number of tape rental outlets grew fourfold
and the standard price for rental of a movies
fell to about $1.50 per night.
APPLICATION 8.3: Movie Rentals



68
Introduction of DVD technology in the mid1990s followed a similar path.
Once a critical threshold of households owned
DVD players, the rental market for movies on
DVD emerged quickly.
Again, the absence of barriers to entry together
with the ready availability of inputs resulted in a
close approximation to the constant cost
model.
APPLICATION 8.3: Movie Rentals



69
This elastic supply response has also dictated a strict
market test for innovations in the movie rental business
– such innovations must be cost-competitive with
existing methods of distribution or they will not be
adopted.
The fate of “Divx” technology provides an instructive
example.
Because consumers had to purchase special
equipment, Divx gained few adherents and was largely
abandoned by the start of 1999.
Shape of the Long-Run Supply
Curve: The Increasing Cost Case

The increasing cost case is a market in
which the entry of firms increases firms’
costs.
–
–
–
70
New firms may increase demand for scarce inputs
driving up their prices.
New firms may impose external costs in the form
of air or water pollution.
New firms may place strains on public facilities
increasing costs for all firms in the market.
FIGURE 8.8: Increasing Costs Result in a
Positively Sloped Long-Run Supply Curve
Price
Price
Price
SMC
MC
SMC
S
D
AC
MC
P2
AC
P3
P3
P1
0
P1
q1
q2
Output
(a) Typical Firm before
Entry
71
0
q3
Output
(b) Typical Firm after
Entry
0
2
Q1
(c) The Market
Quantity
per week
FIGURE 8.8: Increasing Costs Result in a
Positively Sloped Long-Run Supply Curve
Price
Price
SMC
q1
q2
Output 0
S
D
P1
(a) Typical Firm before Entry
72
D’
P2
AC
P1
0
Price
AC
MC
P2
SMC
MC
q3
Output 0
(b) Typical Firm after Entry
2
Q1
Q2 Q3
(c) The Market
Quantity
per week
FIGURE 8.8: Increasing Costs Result in a
Positively Sloped Long-Run Supply Curve
Price
Price
SMC
MC
P2
Price
SMC
MC
D
AC
P1
q2
Output 0
(a) Typical Firm before Entry
73
S’
LS
P3
P1
q1
S
P2
AC
P3
0
D’
q3
Output 0
(b) Typical Firm after Entry
2
Q1
Q2 Q3
(c) The Market
Quantity
per week
The Increasing Cost Case


74
This case is shown in Figure 8.8, where the
initial equilibrium price is P1 with the typical firm
producing q1 with total output Q1. Economic
profits are zero.
The increase in demand to D’, with short-run
supply curve S, causes equilibrium price to
increase to P2 with the typical firm producing q2
resulting in positive profits.
The Increasing Cost Case




75
The positive profits entice firms to enter which
drives up costs.
The typical firm’s new cost curves are shown
in Figure 8.8 (b).
The new long-run equilibrium price is P3 with
market output Q3.
The long-run supply curve, LS, is positively
sloped because of the increasing costs.
Long-Run Supply Elasticity

The long-run elasticity of supply is the
percentage change in quantity supplied in the
long run in response to a 1 percent change in
price.
Percentage change in quantity
Long - run elasticity of supply 
76
supplied in the long run
Percentage change in price
[8.5]
TABLE 8.3: Estimated Long-Run Supply
Elasticities
77
Industry
Elasticity Estimate
Agriculture
Corn
Soybeans
Wheat
Aluminum
Coal
Medical Care
Natural Gas (U.S.)
Crude Oil (U.S.)
+ 0.27
+ 0.13
+ 0.03
Nearly infinite
+ 15.0
+ 0.15 - + 0.60
+ 0.50
+0.75
The Decreasing Cost Case

The decreasing cost case is a market in
which the entry of firms decreases firms’
costs.
–
–
78
Entry may produce a larger pool of trained labor
which reduces the costs of hiring.
Entry may provide a “critical mass” of
industrialization that permits the development of
more efficient transportation, communications, and
financial networks.
The Decreasing Cost Case



79
The initial equilibrium is shown as P1, Q1 in
Figure 8.9 (c).
The increase in demand from D to D’ results in
the short-run equilibrium, P2, Q2 where the
typical firm is earning positive economic profits.
Entry drives down costs for the typical firm, as
shown in Figure 8.9 (b).
FIGURE 8.9: Decreasing Costs Result in a
Negatively Sloped Long-Run Supply Curve
Price
Price
SMC
D
MC
P2
AC
P1
0
Output 0
(a) Typical Firm before Entry
80
SMC
MC
AC
q1
S
Price
P1
Output 0
(b) Typical Firm after Entry
2
Q1
Quantity
per week
(c) The Market
FIGURE 8.9: Decreasing Costs Result in a
Negatively Sloped Long-Run Supply Curve
Price
Price
Price
SMC
D
MC
P2
AC
P1
0
P2
SMC
MC
AC
q1
q2
Output 0
P1
Output 0
(a) Typical Firm before Entry (b) Typical Firm after Entry
81
S
D’
2
Q1
Q2
Quantity
per week
(c) The Market
FIGURE 8.9: Decreasing Costs Result in a
Negatively Sloped Long-Run Supply Curve
Price
Price
Price
SMC
D
MC
P2
P2
AC
SMC
P1
q1
q2
Output 0
(a) Typical Firm before Entry
82
S’
MC
AC
P3
0
S
D’
P1
2
P3
q3
Output 0
(b) Typical Firm after Entry
LS
Q1
Q2
(c) The Market
Q3
Quantity
per week
The Decreasing Cost Case



83
Entry continues until short-run economic profits
are eliminated.
The new long-run equilibrium is P3, Q3 as
shown in Figure 8.9 (c).
The long-run supply curve is downward sloping
due to the decreasing costs as labeled LS in
Figure 8.9 (c).
APPLICATION 8.4: How Do Network
Externalities Affect Supply Curves?

Network externalities occur when additional
users cause network costs to decline.
–
84
Subject to Metcalfe’s Law which states that the
number of interconnections possible in a given
communications network expands with the square
of the number of subscribers in the network.
APPLICATION 8.4: How Do Network
Externalities Affect Supply Curves?

These cause negatively sloped long-run supply
curves.
–

85
This can cause lower consumer prices when
demand expands.
Industries subject to network externalities
include telecommunications, computer
software, and the Internet.
APPLICATION 8.4: How Do Network
Externalities Affect Supply Curves?

Telecommunications
–

Computer Software
–
–
86
Most of the gains in developed countries have been
realized, but remain for less developed.
As adoption grows, lower learning costs for users.
These benefits may explain why software
companies are not too concerned with pirating.
APPLICATION 8.4: How Do Network
Externalities Affect Supply Curves?

The Internet
–
–
87
Since anything that can be encoded in digital format
can be shared over the network, benefits for
specialized groups can also be realized.
This, along with the improved storage capacity of
computers, makes it possible to provide specific
types of services that where cost prohibitive before
the Internet.
Infant Industries

Initially the cost of production of a new product
may be very high.
–

88
As the pool of skilled workers grows, costs may
decline.
It is often argued that these “infant” industries
must be protected from lower-cost foreign
competition until they reach the lower cost
portion of their supply curves.