Final answer:
An increase in the cost of cotton seeds for a farmer in a perfectly competitive industry leads to an upward shift in the average variable costs and average total costs, ultimately affecting the supply curve.
Step-by-step explanation:
When a cotton farmer in a perfectly competitive industry encounters an increase in the cost of a significant input, such as cotton seeds, this will influence their cost structures in a few ways. The increase in the price of cotton seeds directly raises the farmer's variable costs.
Since cotton seeds are essential to production, this is an input that the farmer cannot forego, leading to an inevitable increase in costs. This leads to a shift in the farmer's cost curves: both the average variable costs (AVC) and average total costs (ATC) will shift upward because it now costs more to produce the same amount of cotton.
As a result, at each level of output, the costs are now higher, and the farmer must decide whether to continue producing the same amount, reduce output, or potentially leave the market if the costs exceed what the market is willing to pay for the product.
In the context of a constant-cost industry, the supply curve would typically be very elastic and firms would be able to supply any quantity at no change to input costs. However, when the market operates under increasing cost conditions, as in the case of a rise in the price of seeds, the curves shift reflecting that increased cost.
Unlike constant-cost industries, an increasing cost industry will have the supply curve shift to the left as firms experience higher production costs, reducing the quantity supplied at any given price.