Vecka 2 föreläsningar del 1 Flashcards
Why do countries trade with each other?
- Comperative advantages, Differences in productivity and factors of Production produce trade Patterns and gains.
- Economies of scale, when the cost per unit produced is lower for larger production even identical countries can benefit from trading with eachother.
What is Internal economies of scale?
When larger firms have lower Production costs. It leads to Large firms and imperfect competition, lower Prices and more diverse supply.
What is External economies of scale?
When firms in a sector have lower production costs the larger it is in a Particular location. Leads to Many small companies and full competition. Fewer different sectors Per country but lower prices everywhere.
What are some Causes of economics of scale?
- Specialised subcontractors.
- Common labour market
- Dissemination of knowledge
What happens with the supply curve if the average cost decreases?
It falls forward
What competition occur with External economies of scale?
Perfect competition.
What happens when there is External economies of scale and international trade?
- The price falls everywhere cause the country with Comparative advantage can produce more because it sells it to other countries and their average cost will be even lower. So the Price is lower everywhere when trading then in any of the countries before they traded.
Why is there No guarantee that cheapest producer produces?
Vietnam could for example eventually produce cheaper than China but China has a big initial lead and can take advantage of economies of scale and their knowledge. In some cases costs may fall over time but only if you produce. With dynamically increasing returns to scale production provides a build-up of knowledge that results in lower production costs over time. An initial lead can lead to perpetual dominance even when others have potentially lower costs.
Why is Infant industry argument used?
To Protect young immature sectors. Theoretically Plausible but difficult in Practice.
How is the Market forms in case of internal economies of scale?
- Average cost falls as individual firms produce more.
- Large firms will have cost advantage over smaller firms.
- Prices are squeezed, smaller firms are eliminated, the number of firms decreases. (monopoly, Oligopoly)
- Monopolistic competition if firms survive by differentiate their products.
Who are price takers in a perfect competition and how does the market look?
Companies are price takers, there are Identical products, small businesses, MR =P
What are companies In imperfect competition and how does the market look?
price setters, If they raise the price, they sell less, but not nothing They can sell more but only if they lower the Price. MR< P
What is MR?
Marginal revenue (MR): Increase in revenue if ΔQ=1.
How is the relation between MR and P in a monopoly?
MR<P when Price needs to decrease to increase Q.
What is MC?
Marginal cost (MC): Increase in cost for ΔQ = 1. we assume constant Mc.
