Increasing returns to scale Flashcards
How does the increasing returns to scale differ from comparative advantage models?
Comparative adv
-assumes that inputs increase at the same rate as outputs e.g double inputs doubles output
- prices equalize under free trade
IRTS
-when inputs increase at a rate, output increases at a faster rate
-trade leads to lower prices that are lower pre trade
what is an External EoS
when cost per unit of output depends on industry size
a geographic concentration of skills and knowledge that spillover between firms e.g new york banking, semiconducters in silicon valley, textiles in china
explain what happens to two economies under trade (involving external EoS)
the concentrated economy expands, lowering costs and the external economy shrinks
eventually the concentrated economy should be the sole producer of the good as disparities rise
is external EoS socially optimal?
yrs. by concentrating production it makes it cheaper to produce and better off for everyone. even if it is cheaper than elsewhere.
it is possible to be worse off - if network externalities come in play and the wrong location is chosen
what are internal EoS?
large firms are more efficient than small firms, making perfect competition impossibleas large firms can achieve a lower ac
flows into a monopolistic competition model as each firm makes a slightly different model
when are firms in monopolistic competition supposed to sell more and less? (internal EoS)
more as total sales in the industry increase and as prices charged by rivals increase.
less as the number of firms in the industry increases and as the firm’s price increases.
in domestic settings with no trade -when will an internal EoS in monopolstic competition sell more/less?
As the number of firms n in the industry increases, the average cost increases for each firm because each produces less
As total sales S of the industry increase, the average cost decreases for each firm because each produces more.
what happens to AC for internal EoS with trade?
AC should decrease as the market size is expanded and more consumers can be attracted,. however, introduce more participants but if the market stays monopolistically competitive it should decrease AC (assuming same costs, demand etc)
Adjustment costs: some firms shut down; workers are laid off Workers relocate to surviving (=expanding) firms
how can 2 countries trade without comparative advantage?
Product differentiation and internal economies of scale lead to trade between similar countries with no comparative advantage differences between them
what is intra-industry trade?
refers to two-way exchanges of similar goods.
Most prominent is the trade of manufactured goods among
advanced industrial nations, which account for most of the
world trade
like Germany shipping out Volkswagen and importing hondas
what is melitz model?
firm heterogeneity and trade
Increased competition tends to hurt the worst-performing
firms — they are forced to exit. The best-performing firms take the greatest advantage ofnew sales opportunities and expand the most. When the better-performing firms expand and the worse performing ones contract or exit, average labour productivity increases.
shifts resources from unproductive domestic firms to effecient export firms
like innovation cost reducing
why do firms produce more for domestic consumers?
only 35% of U.S. manufacturing firms reported any exports.
In the United States, in a typical manufacturing industry, an exporting firm is on average more than twice as large as a firm that does not export
firms need to be large and afford the costs associated with trade - good for monopolistically competitive markets (added cost on demand line)
Is the existence of product differentiation a necessary
condition for the existence of intra-industry trade? Why or
why not?
yes. consumers love variety and lower costs, trade provides this especially when internal EoS can operate across borders - melitz theory
