Internal Economies of Scale Flashcards
Explain why internal economies of scale lead to imperfect competition.
Because a company with internal economies of scale doesn’t sell at marginal cost, because it would imply a loss for earlier production, it can produce more output and sell at AC lower than marginal cost such that a monopoly would form, if the market i big enough.
What equality describes the point where a monopolist will sell its product. Why?
Marginal Revenue = Marginal Cost.
MR = MC, no profit is made, before that point, profit was made on the unit sold, after that point, a loss is incured to the firm.
In the model of monopolistically competitive firms, what assumption is made that seems unrealistic.
That the average price set by the oligopolies doesn’t affect total output, such that firms can only steal clients from each other.
What is the optimal number of firms in amonopolistically competitive industry?
P = AC such that the two equations above are equal to each other.
What is the effect of opening up to trade in a monopolistically competitive market?
More firms overall than in each individual market before opening, but less than the sum of both. Prices go down.
Comparing two firms in such an industry, one with higher marginal cost than the other, what are the differences in terms of price, markup, output and profits. Show this graphically.
The one with the lower marginal cost will set a lower price, get a higher markup, produce more output and receive higher profits
What are the effects on big vs large firms when opening up to trade.
Larger firms benefit from a higher market s.t profits are also higher. Smaller unproductive firms face the competition s.t profi margins decrease. The most unproductive firms will quit the market entierly.
What is the slope of the demand curve an what is the intercept a equal to?
Slope: 1/b*s
a = P(average) - 1/b*n
What is the effect of opening up to trade on the slope and the intercept of the demand curve. What is the effect on a graph of Operating profits as y and Marginal cost as x? Show graphically-
Because there are more firms overall than in each of the countries, the intercept a is lower. The slope is also smaller because the Market S is bigger.
Difference between greenfield and brownfield investments.
Greenfield is FDI that “creates” new capacity while brownfield is FDI that “acquires” new capacity.
Difference between Horizontal FDI and Vertical FDI.
Horizontal is a replication of a production process elsewhere in the world while Vertical is not.
