Suppose you own a home remodeling company. You are currently earning short-run profits. The home remodeling industry is an increasing-cost industry. In the long run, what do you expect will happen to
a. Your firm's costs of production? (will production costs rise or fall and justify why)
b. The price you can charge for your modeling services? why? (will production costs rise or fall and justify why. How does the supply and/or demand curve shift and what happens to equilibrium prices?)
c. Profits in home remodeling? why? (Is this same as economic profits? will they rise or fall and justify answer)
a. Your firm’s costs of production? Explain.
As firm is making short-run profits, new firms will enter into the market. Demand for input factors will increase. So, inputs will become costlier for increasing-cost industry. We can say that costs of production will increase.
b. The price you can charge for your remodeling services? Why?
The price you can charge for your remodeling services? Why?
As costs of variable and other input will increase. Prices are dependent on marginal costs. So, prices will also increase.
c. Profits in home remodeling? Why?
As discussed, new firms will enter because of current short run profits. This will increase competition and will pressurize prices. We have seen that costs are also increasing. We can say that Profits will decrease in long run and firms will make normal profits only.
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a. In an increasing-cost industry like home remodeling, the firm's costs of production are expected to rise in the long run. This is because as the industry expands, the demand for resources such as skilled labor, building materials, and equipment increases. As the demand for these resources increases, their prices rise. Higher resource prices lead to higher production costs for the firm.
b. As the firm's production costs rise in the long run, the price it can charge for remodeling services is also likely to increase. This is because the higher production costs make it more expensive for the firm to provide its services. In order to maintain its profitability, the firm needs to pass on these higher costs to its customers in the form of higher prices. As a result, the supply curve for remodeling services would shift upward, leading to higher equilibrium prices.
c. Profits in home remodeling may not necessarily rise in the long run, and this depends on the level of competition in the industry. In a competitive market, where there are no barriers to entry, firms will enter the industry in response to short-run profits. This increased competition will drive down prices, resulting in lower profits for each firm. However, if there are barriers to entry or limited competition, firms may be able to maintain or even increase their profits in the long run.
It's important to note that profits in this context are referring to accounting profits, which typically include only explicit costs. Economic profits, on the other hand, consider both explicit and implicit costs. If economic profits are higher than zero in the short run, entry into the industry will occur, which will eventually drive profits down to zero in the long run.
a. In an increasing-cost industry like home remodeling, the costs of production are expected to rise in the long run. This is because as more firms enter the industry, the demand for inputs, such as labor and materials, increases. As the demand for these inputs rises, their prices also increase, leading to higher production costs for individual firms.
b. The price that a remodeling company can charge for its services is likely to increase in the long run. As the costs of production for firms in the industry rise, they need to pass on some of these costs to consumers in the form of higher prices. This shift in costs is reflected by a rightward shift in the supply curve for remodeling services. Meanwhile, assuming the demand for remodeling services remains relatively constant or increases, the demand curve would remain unchanged or shift to the right, respectively. The combination of the rightward shift in the supply curve and the relatively constant or increased demand curve would result in an increase in the equilibrium price for remodeling services.
c. Profits in home remodeling may not necessarily rise in the long run. While short-run profits may exist due to market conditions such as low competition or high demand, in the long run, profits tend to be driven towards zero in a perfectly competitive market. Economic profits, which represent the difference between total revenue and total costs (including opportunity costs), may diminish as more firms enter the industry. This is because the increased competition leads to lower prices and potential excess supply. Therefore, while short-run profits may exist, they are not sustainable in the long run as competition erodes those profits.