ECON 3601 Lecture Notes - Lecture 7: International Trade, Imperfect Competition, Perfect Competition

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12 Jun 2018

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Chapter 7 – External Economies of Scale and The International Location of Production

Introduction

• The odels of opaatie adatage thus fa assued ostat etus to sale:

– When inputs to an industry increase at a certain rate, output increases at the same rate.

– If inputs were doubled, output would double as well.

• But thee a e ieasig etus to scale or economies of scale:

– This means that when inputs to an industry increase at a certain rate, output increases at a

faster rate.

– A larger scale is more efficient: the cost per unit of output falls as a firm or industry increases

output.

• Mutuall eefiial tade a aise as a result of economies of scale.

• Iteatioal tade peits eah out to podue a liited age of goods without

sacrificing variety in consumption.

• With tade, a out a take adatage of eooies of sale to podue oe effiietl

than if it tried to produce everything for itself.

Economies of Scale and Market Structure

• Eooies of sale ould mean either that larger firms or a larger industry would be more

efficient.

• Eteal eooies of sale ou he ost pe uit of output depeds o the size of the

industry.

• Iteal eooies of sale ou he the ost pe uit of output depeds on the size of a

firm.

• Both eteal ad iteal eooies of sale ae ipotat auses of iteatioal tade.

• The hae diffeet ipliatios fo the stutue of idusties:

– An industry where economies of scale are purely external will typically consist of many small

firms and be perfectly competitive.

– Internal economies of scale result when large firms have a cost advantage over small firms,

causing the industry to become imperfectly competitive.

The Theory of External Economies

• Ma odern examples of industries that seem to be powerful external economies:

– In the United States, the semiconductor industry is concentrated in Silicon Valley, investment

banking in New York, and the entertainment industry in Hollywood.

– In developing countries such as China, external economies are pervasive in manufacturing.

• Oe to i Chia podues ost of the old’s underwear, another nearly all cigarette

lighters.

– External economies played a key role in India’s emergence as a major exporter of information

services.

• Idia ifoatio seies opaies ae still lusteed in Bangalore.

• Eteal eooies a eist fo a fe reasons:

1. Specialized equipment or services may be needed for the industry, but are only supplied by

other firms if the industry is large and concentrated.

– For example, Silicon Valley in California has a large concentration of silicon chip companies,

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which are serviced by companies that make special machines for manufacturing silicon chips.

– These machines are cheaper and more easily available there than elsewhere.

2. Labor pooling: a large and concentrated industry may attract a pool of workers, reducing

employee search and hiring costs for each firm.

3. Knowledge spillovers: workers from different firms may more easily share ideas that benefit

each firm when a large and concentrated industry exists.

• Repeset eteal eooies sipl  assuig that the lage the idust, the lower the

industry’s costs.

• Thee is a foad-falling supply curve: the larger the industry’s output, the lower the price at

which firms are willing to sell.

• Without iteatioal tade, the uusual slope of the supply curve doesn’t matter much.

External Economies and International Trade

• Pio to iteatioal tade, euilibrium prices and output for each country would be at the

point where the domestic supply curve intersects the domestic demand curve.

• Suppose Chiese utto pies i the asee of tade ould e loe tha U.S. utto

prices.

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Document Summary

Chapter 7 external economies of scale and the international location of production. Introduction: the (cid:373)odels of (cid:272)o(cid:373)pa(cid:396)ati(cid:448)e ad(cid:448)a(cid:374)tage thus fa(cid:396) assu(cid:373)ed (cid:272)o(cid:374)sta(cid:374)t (cid:396)etu(cid:396)(cid:374)s to s(cid:272)ale: When inputs to an industry increase at a certain rate, output increases at the same rate. If inputs were doubled, output would double as well: but the(cid:396)e (cid:373)a(cid:455) (cid:271)e i(cid:374)(cid:272)(cid:396)easi(cid:374)g (cid:396)etu(cid:396)(cid:374)s to scale or economies of scale: This means that when inputs to an industry increase at a certain rate, output increases at a faster rate. An industry where economies of scale are purely external will typically consist of many small firms and be perfectly competitive. Internal economies of scale result when large firms have a cost advantage over small firms, causing the industry to become imperfectly competitive. The theory of external economies: ma(cid:374)(cid:455) (cid:373)odern examples of industries that seem to be powerful external economies:

Related Questions

constant costs

increasing returns to scale

constant returns to scale

isocost curve

decreasing returns to scale

isoquant

diseconomies of scale

long-run average cost

economies of scale

long-run marginal cost

economies of scope

marginal rate of technical substitution

expansion path

short-run expansion path

___A curve that displays all the various combinations of inputs that will produce a given amount of output.

___The rate at which one input is substituted for another along an isoquant.

___Line that shows all the possible combinations of inputs that can be purchased for a given total cost.

___A curve showing all of the cost-minimizing levels of input usage for various levels of output.

___When the usage of all inputs is increased by an equal proportionate amount, output ___increases by exactly the same proportion.

___When the usage of all inputs is increased by an equal proportionate amount, output increases by a larger proportionate amount.

___When the usage of all inputs is increased by an equal proportionate amount, output increases by a smaller proportionate amount.

___Cost per unit in the long run.

___The change in long-run total cost per unit change in output.

___When long-run average cost falls as output increases.

___When long-run average cost increases with increases in output.

___Long-run average and marginal costs are equal for all levels of output.

___The situation in which the joint cost of producing two goods is less than the sum of the separate costs of producing the two goods.

___Horizontal line showing the cost-minimizing input combinations for various output levels when capital is fixed in the short run.

aquamarineguinea-pig889

According to estimates presented in the textbook, which of the following factors made the smallest contribution to U.S. growth between 1928 and 1997?

A) Technology.
B) Human capital.
C) Physical capital.
D) Labor.

According to economist Hernando DeSoto, the lack of formal property rights in many poor countries limits economic growth because informal property rights:

A) lead to excessive investment in physical, social, and human capital.
B) limit the amount that businesses and households can borrow.
C) result in excessive government regulation.
D) decrease the labor force participation rate.

The theory of convergence depends on the assumption that:

A) population growth falls to replacement levels in all nations.
B) factors of production are mobile across borders.
C) technological advancement slows.
D) production functions have constant returns to scale.

The surge in foreign direct investment experienced by China and India in the early 2000s can best be explained by:

A) their higher marginal productivity of capital, which leads to lower production costs.
B) their lower marginal productivity of capital, which leads to lower production costs.
C) the limits they impose on factor mobility.
D) technological agglomeration.

The idea behind Say's Law is that people work because:

A) they like to work.
B) they want to buy things.
C) they want to accumulate wealth.
D) work gives them social status.

People's knowledge is a type of capital, called human capital.

A) True
B) False

The law of diminishing marginal productivity applies whenever:

A) output is increased.
B) all inputs are increased.
C) only one input is increased.
D) decreasing returns to scale are present.

13.

The theory of convergence argues that poor nations should, if they pursue the right policies,

A) grow at the same rate as rich nations.
B) grow faster than rich nations.
C) develop the same social-welfare structures as rich nations.
D) stop their exploitation by the rich nations.

14.

If increasing returns to scale exist, then an increase in output of exactly 3 percent is most likely to be produced by:

A) a decrease in all inputs of 3 percent.
B) an increase in all inputs of less than 3 percent.
C) an increase in all inputs of 3 percent.
D) an increase in all inputs of more than 3 percent.

15.

The production function is best represented in the following form:

A) Output = A.
B) Output = f(Labor, Capital, Land).
C) Output = A%u2022f(Labor, Capital, Land).
D) Output = [A%u2022f(Labor, Capital, Land)]^b.

16.

The effect of economic growth generally has been to make:

A) the poor poorer and the rich richer.
B) the poor richer and the rich poorer.
C) all income levels richer.
D) the rich richer but not affect the poor.

Scale economies describe what happens to output when:

A) one input changes.
B) all inputs change by the same percentage.
C) technology changes.
D) institutions change.

1. The introduction of a union into a monopsony labor market will cause employment in this market to

A. Rise

B. Fall

C. Remain constant

D. Change in a manner than cannot be determined without additional info.

2. Unions may attempt to increase the demand for union workers by

A. Advocating boycotts of nonunion products

B. Lobbying for trade restrictions

C. Lobbying for laws that restriuct the availability of substitute labor inputs

D. All of the above

E. None of the above

3. As a result of the scale effect associated with a higher wage, the quantity of labor demanded is expected to

A. Fall

B. Rise

C. Remain unchanged

D. Change in an unpredictable manner

4. If a union successfully urges consumers to boycott products produced by nonunion workers, the own-wage elasticity of demand for union labor is reduced

A. Under no circumstances

B. Because the scale effect resulting from a change in the wage will be smaller in magnitude since the boycott lowers the price elasticity of demand for output

C. Because the substitution effect in the labor market resulting from a change in the wage will be smaller in magnitude since the boycott lowers the price elasticity of demand for output

D. Because labor demand falls in response to the boycott

5. union sponsored boycotts of products produced by nonunion workers will affect the elasticity of demand for union workers by affecting the

A. Substitution effect in the labor market

B. Scale effect in the labor market

C. None of the above

6. In a local labor market

A. There are many employers and employees in most local areas

B. Foreign citizens are not allowed to apply for jobs

C. Most employer and employee search is conducted at the national level

D. There are few potential employers and employees in most local areas

7. Economic theory predicts that the cost of general training will be

A. Borne by workers

B. Borne by firms

C. Shared between workers and firms

D. None of the above

8. During a recession, firms are most likely to layoff workers who possess

A. only firm-specific training

B. only general training

9. Productivity is likely to decline by more during a recession for those labor markets in which workers possess a high level of

A. General training

B. Firm-specific training

C. Either general or firm-specific training

D. None of the above

10. Suppose that some previously discouraged workers start looking for work because they become more optimistic about their prospects. The immediate effect of this is expected to be

A. An increase in the unemployment rate

B. A decrease in the unemployment rate

C. An unchanged unemployment rate

D. A reduction in the labor force participation rate

11. The introduction of government-mandated health insurance for all employees would result in a substitution effect that

A. Raises employment and increases the length of the workweek

B. Lowers employment and reduces the length of the workweek

C. Reduces employment and raises the length of the workweek

D. Increases employment and reduced the length of the workweek

12. As the wage rate increases, the quantity of labor demanded will decrease

A. Under no circumstances

B. Only if the substitution effect exceeds the scale effect

C. Only if the scale effect exceeds the substitution effect

D. As a result of both the substitution and scale effects

ECON 3601 Lecture Notes - Lecture 7: International Trade, Imperfect Competition, Perfect Competition

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