Final answer:
Entry of new firms into an increasing-cost industry leads to raised resource prices due to limited inputs like skilled labor, which results in higher production costs and creates a more inelastic supply curve. A subsequent wage increase further elevates costs and market prices. Technological improvements may initially lower costs and attract new firms, but the market supply increase will eventually return profits to the zero-profit level.
Step-by-step explanation:
When new firms enter an increasing-cost industry, resource prices tend to rise, particularly because of the increased demand for limited inputs such as skilled labor. In such industries, as firms vie for limited resources, they drive up prices, leading to higher costs of production across the industry. Concurrently, the industry supply curve becomes more inelastic, which reflects the increased costs of entry for new firms and the reduced ability of the market to expand supply without driving up prices.
An increase in wages is a common example of how resource prices can increase in an increasing-cost industry, leading to higher costs of production for all firms and shaping a market where the supply curve shifts left, resulting in increased market prices.
If a technological improvement occurs leading to reduced production costs, the entry of new firms due to temporary economic profits causes a rightward shift in the supply curve. However, this influx stops once profits are again driven down to zero-profit level due to the increased market supply by both existing and new firms.