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What Is a Decreasing-Cost Industry?

A decreasing-cost industry is one where companies experience lower costs per unit as the industry grows, often due to economies of scale, improved technologies, or collective learning. This can lead to more competitive pricing and innovation, benefiting consumers. Curious about how this dynamic could affect your wallet or investments? Dive deeper to uncover the implications of such industries on the economy.
K.C. Bruning
K.C. Bruning

A decreasing-cost industry is one in which the cost of an item declines as its production increases. The phenomenon is referred to as a downward-sloping, long-run supply curve. This is caused by the growth of an industry, which typically results in more competitors, less demand, and lower perceived value of the product. Depending on the nature of the business, decreasing-cost industry can either cause the decline of a company or simply be a part of its natural evolution.

One of the most common reasons for decreasing-cost industry is competition. When the market for a product expands, competitors will typically step in to meet increased demand. While existing companies may be able to charge a premium for brand recognition or perceived value due to experience, they will often need to lower prices at least somewhat in order to stay in business.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

In some cases, decreasing-cost industry happens because an increase in production does not significantly affect the cost of producing the product. This is common with knowledge-based products such as software. It can also be a factor in the production of items which can be significantly improved with greater efficiency. Once the company has learned how to maximize its efforts, it can increase its customer base by lower prices.

Decreasing-cost industry may also be the result of a company’s decreasing cost of doing business. This can be due partly to the initial investment made by a company in start-up costs such as equipment, recruiting, and hiring. Once a company has reached a certain level of success, the costs related to these elements tend to drop. A company that has successfully produced a product for a certain period of time will often also have lower production costs. This is often because it has through trial and error developed the most efficient way of making and distributing the product.

Other types of industries include increasing-cost and constant cost. Increasing-cost industry happens when prices go up due to an increase in demand for manufacturer resources. This can include an increase in salary for employees whose skills are in demand and higher prices for inventory items that are in short supply. Constant cost industry is a situation in which increased demand does not affect the cost of production. This is commonly seen in areas such as the retail industry, where the entry of a new business does not tend to affect prices or employee salaries

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