class7

Question 1

Internal economies of scale

Answer 1

occur when the cost per unit depends on the size of an individual firm. A firm is then more efficient.
Cost advantage comes from larger firm sizes and lead to imperfect competitive market structures.

Question 2

External economies of scale

Answer 2

Concentrating production of an industry in one or a few locations reduces the industry’s costs even if individual firms in the industry remain small. the cost per unit depends on the size of the industry

Question 3

Advantages external economies of scale

Answer 3

Specialized suppliers:
Specialized inputs (equipment or support services) may be needed for the industry, but are only supplied by other firms if the industry is large and concentrated.

Labor market pooling:
A large and concentrated industry creates a pooled market and attracts highly specialized skill workers, reducing employee search and hiring costs for both employees and workers

Knowledge spillovers:
- Workers from different firms may more easily share ideas that benefit each firm when a large and concentrated industry exists.
- Companies can acquire technology from their own research and development efforts.
- Companies can also learn from competitors: informal exchange of information and ideas and/or technical issues.

Question 4

External economies and market equilibrium

Answer 4

A bigger industry generates stronger external economies of scale.
The larger the industry the lower the industry’s costs.

Supply curve = forward-falling supply curve: average cost of production falls as industry output rises.
Instead of a horizontal or upward-sloping supply curve, external economies imply a forward-falling supply curve. Average cost falls as the quantity produced rises

Question 5

What happens if trade is opened up?

Answer 5

The large country’s industry expands, while the small country’s industry contracts
In the end (if trade costs are equal to 0), only the large country’s industry survives
Trade leads to prices that are lower than the prices in either country before trade!

Question 6

Reasons to have a price advantage and trade

Question 7

Reasons to have a price advantage and trade

Answer 7

• Market size:
  The large country has pre-trade price lower: it will produce more, specialize, be more competitive and wins. Still both countries are better off.
• Historical accident
  historical contingency: something gives a particular location an initial advantage in a particular industry, and this advantage gets locked in by external economies of scale even after the circumstances that created the initial advantage are no longer relevant.