Economies of Scale Flashcards
What are the main characteristics/assumptions of economies of scale (INTERNAL)?
Non-Comparative Advantage:
- More efficiency with more production (no longer constant returns to scale).
- Market power (not take prices as given).
- Heterogeneous firms (no longer identical).
- Differences in countries leading to =/= prices to =/= gains from trade no longer only reason why countries trade.
- At the individual firm level.
How can trade patterns in Argentina & Brazil be explained by economies of scale?
They have similar trade patterns and similar comparative advantages (goods) w/ROW, yet they still trade with each other. Trade w/ each other is very similar, and very different from trade w/ ROW.
They trade the same goods with each other because they produce different models (e.g. car manufacturing) because they’re the cheapest or most convenient option for the company and provide more variety of options for consumers. There are also trade agreements between both countries that come into play.
Why does international trade often occur from increasing returns to scale?
Prices go down and variety goes up??
What are the sources of external economies?
What are the differences between internal and external economies of scale?
What are the roles of external economies and knowledge spillovers in shaping
comparative advantage and international trade patterns?
What’s another term for economies of scale and how can you describe it?
Increasing returns, meaning output will not increase proportionally if you increase (e.g. double) input.
What happens in economies of scale when output production increases?
The average input of production (e.g. labor) needed per unit of output decreases.
Meaning labor needed is divided between more units, so less labor is allocated to each output unit.
You can increase output with less additional labor than what you needed for the first output units.
What happens to output as labor input increases?
Increases exponentially (positive slope).
What happens to average labor input as output increases?
Decreases exponentially (negative slope).
When do external economies occur?
When cost per unit (efficiency) depends on the size of the industry.
When do internal economies occur?
When cost per unit (efficiency) depends on firm size.
Si hay solo external economies of scale, what will be the structure of the industry?
Industry would be perfectly competitive, with many small firms.
With internal economies of scale, what will be the industry structure?
Large firms get an advantage over small ones –> imperfectly competitive market structure.
What are the three main reasons why a cluster of firms may be more efficient than a firm in isolation?
- Specialized Suppliers: Cluster provides large enough market for specialized suppliers to come and help with production and development (innovation). Cluster spreads this development costs (no tienen que develop capital internally).
- Labor Market Pooling: For workers with specialized skills.
