Increasing Returns to Scale Models Flashcards
under monopoly, profits are maximised when…
MR = MC and output and price determined from demand curve
describe demand with 2 firms
with competitor, firms demand depends on price charged by competitor and on nature of product
- if goods are homogenous and one firm charges lower price they obtain entire market demand
- if goods are differentiated, lower priced firm will capture more but not all of market demand
assumptions of monopolistic competition - assumption 1
each firm produces good thats differentiated to other goods in market and consumers have taste for product variety
- since goods are differentiated, firms can raise prices
- each firm faces downward-sloping demand for its product
assumptions of monopolistic competition - assumption 2
there are many firms in industry
- with n firms, d/2 is demand each firm faces if everyone charges the same
assumptions of monopolistic competition - assumption 3
firms use technology characterised by increasing returns to scale
- average costs of production fall as output increases
- marginal costs must lie below average costs
assumptions of monopolistic competition - assumption 4
firms can enter and exit industry freely, so that firm profits are zero in the long run
- firms enter as long as they have positive profits
- market entry reduced profits per firm
- in long run, profits per firm become 0 as under perfect competition
define ‘monopolistic competition’
each firm monopolist over its variety but free entry and exit creates competition and erodes profits
two sources of gains for consumers
1) consumers benefit from lower prices in all varieties
2) consumers have access to additional varieties that weren’t available under autarky
define ‘maquiladora plants’
mexican plants located close to US border which manufacture almost exclusively for exports to US
gravity equation for trade states that…
countries with larger GDPs or that are close to each other will have more trade between them
assumption of trade under monopoly model…
monopolist views two markets as segmented
why does market segmentation occur?
due to transportation costs, language barriers or different currencies
when does dumping occur?
when firm sells product abroad at price that is either less than price it charges in local market (price dumping) or less than its average cost to produce it (cost dumping)
why do firms dump?
it is profit maximising
define ‘marginal revenue’
(extra revenue earned from selling one more unit - implied fall in price) x quantity sold of all earlier units
