Terms in this set (21)
Constant Returns to Scale
Output and input increase at the same rate
Increasing Returns to Scale
Output increases faster than input increases
Efficiency and EOS
EOS lead to efficiency. With EOS the average unit of labor needed per unit of output is less when the industry produces more
External Economies of Scale
Lowering of a firm's cost due to external factors. External factors are outside the control of the company, but they create externalities that positively influence the company.
Increase the productivity of an entire industry, region or geographical area.
Internal Economies of Scale
Internal decisions made by each individual firm that lower the firm's costs. Cost per unit of output depends on the size of the firm.
Industry with purely external EOS
1. Consists of small firms
2.Will be perfectly competitive
3.Firms are price takers--can't control mkt price of their product
Industry with internal EOS
1.Large firms have cost advantage over small firms
3.Defined by two or three large firms that can take advantage of EOS
4.Difference in price of goods
Semiconductor Industry in Silicon Valley
Manuf. in China
Exporting Services from India
Examples of external EOS.
Concentrating production of an industry in one or few locations can reduce cost for the industry overall
Why to external EOS exist?
1.A cluster of firms can be more beneficial than individual firms
2.Labor Pooling--reduces search time for workers
4. The larger the industry the lower the costs
How does an industry's output effect price?
The larger the output of the industry, the lower the P each firm is willing to sell. (larger industry increases supply, thus price has to be lowered to attract customers)
Forward Falling Supply Curve
Reflects the statement that the more output there is the lower the price will be. Increasing production due to trade further depresses the price
Considering external EOS, what could give some countries an advantage?
1.Comparative advantage in production due to the resources they possess.
2.Historical accident--they have been producing the longest
P(country A) < Co (country B)
But country B has a lower avg. cost curve (AC)
Production will still occur in country A because their prices are lower than the price of a start up. Country B may have a lower cost curve once the company gets started, but country A will be able to offer for a lower price initially.
Effects of trade based on external EOS
Has ambiguous effects.
In some cases it makes the costs of the industry cheaper. All the materials are located in one place, searching for labor is easier and knowledge spillover is possible.
Some firms could be more productive if they weren't in close competition.
Some countries may be better off producing domestically.
When do increasing returns to scale exist?
If average costs fall as cumulative output rises over time
EX/ the cost of production depends on accumulation of knowledge and experience over time
Older companies tend to be more experienced and have higher quality products that have come to be more demanded over time
Trade within a country, between regions
EX/ Movie producers are located largely in LA, but they distribute movies throughout the entire USA
The study of international trade, interregional trade, and the organization of economic activity in metro and rural areas.
Give examples of two products traded on international markets with dynamic increasing returns. Show how innovation and learning-by-doing are important.
Dynamic Increasing Returns- when average costs fall with cum. output. A learning curve exists that favors established companies over start ups.
Biotechnology- innovation fuels new products in this industry, but it also requires some practice to successfully turn an idea into a new product.
Aircraft Design- requires innovations to create new planes that are safer and more fuel efficient. Existing models can also be improved with modifications (generational products)
Industrial clusters can move location rapidly depending on lower wages, tech, skill, etc....Explain this tendency in terms of the theory of external eos.
External Eos need access to specialized suppliers, labor market pooling, and knowledge spillovers. As three things weaken in one area, so do the benefits of geographic clustering.
How can industrial concentration in one country negatively effect another country?
Even though China has higher wages, the ext. eos of sale industries located in China won't move to a country with lower wages. China's industries have been established
longer than Vietnam's, therefore they have dynamic increasing returns. China can always offer a price lower than the start up price, (or initial cost) in Vietnam. Vietnam is effected because production would only shift there if China's avg. cost curve were to shift up enough that the new equilibrium price and cost in China were above the start up cost in Vietnam.
In labor market pooling it is advantageous to have two firms in the same location. If one expands, while the other contracts, is it to the advantage of both firms and workers?
What if both firms expand or both contract?
If there are two firms in the same location and a limited labor supply of 200 workers and both expand their labor capacity from 100 workers to 150 workers, they will both experience a shortage of 50 workers.
If the two firms are far apart and their local labor supply is 100 workers each (maintaining total of 200) and they expand from 100 workers to 150, each firm will still experience a shortage of 50 workers. In the case of both firms expanding locating next to each other doesn't present any disadvantages because both experience the same shortage in each scenario.
It is however helpful to be located in close proximity when one firm is expanding and the other is contracting.
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