External Economies Magnify an Expansion in a Competitive Industry
(Figure 5.5)

Figure 5.5 imagines that a national semiconductor industry is competitive, but characterized by external economies of scale. There is an initial equilibrium at point A, with many firms competing to sell 40 million units at $19 a unit. What is new in this diagram is the coexistence of the upward-sloping supply curve S1 with the downward-sloping long-run average cost curve. The upward-sloping supply curve is the sum of small individual firms' views of the market. The industry's downward-sloping average cost curve comes into play when demand shifts.
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