If an industry wide increase in cost happens and the average cost curve for each firm shifts up by $1 will the cost per unit also increase by exactly $1?
Unless the demand for that item is perfectly inelastic, the final price will rise by less than $1
To understand if the cost per unit will increase by exactly $1 when the average cost curve for each firm shifts up by $1, we need to consider the concept of elasticity. Elasticity measures the responsiveness of quantity demanded to changes in price.
If the demand for the product is perfectly inelastic, it means that the quantity demanded remains the same regardless of changes in price. In this case, the cost per unit would indeed increase by exactly $1. However, perfect inelasticity is a rare scenario in real-world markets.
In most cases, demand is elastic or inelastic but not perfectly inelastic. If demand is elastic, it means that the quantity demanded is highly responsive to changes in price. In such a situation, if the cost per unit increases by $1, the firm would have to bear the burden of the price increase, causing a decrease in demand and the firm's ability to sell at the same quantity. As a result, the final price would rise by less than $1.
On the other hand, if demand is inelastic, it means that the quantity demanded is not very responsive to changes in price. In this case, the firm may be able to pass on a significant portion of the cost increase to consumers, resulting in a price increase closer to $1.
Therefore, unless the demand for the item is perfectly inelastic, the final price will rise by less than $1 when the average cost curve for each firm shifts up by $1.