Week 5 - Chapter 6: Scale economies, imperfect competition, and trade Flashcards
Constant returns to scale
Input use and total cost rise in the same proportion as output increases. Average cost remains the same
Scale economies
Output quantity goes up by a larger proportion than does total cost, as output increases
Therefore, of output expands faster than total cost does, the average cost will decrease.
This can be seen with the graph below
Internal scale economies
A result of the actions and decisions of the individual firm itself
Reasons why a larger firm may have lower average costs
Typically large upfront, R&D, can be spread over a larger output, reducing a firm’s average cost
Large, specialised equipment that operate at a high volume achieve lower costs per unit
As the size of storage increases, capacity increases more than proportionally to surface area
Monopolistic competition
A type of market structure in which a large number of firms compete vigorously with each other in producing and selling varieties of the basic product
Oligopoly
A few large firms dominate the global industry, perhaps due to substantial scale economies
External scale economies
Based on the size of an entire industry within a specific geographic area
The average cost of the firm producing the product will decline as the out of the whole industry increases
External scale economies explain the clustering of the production of some products in geographic area
What are the two sources of external scale economies?
Concentration of an industry’s firms in a geographic area attracts greater local supplies of specialised services and labour
New knowledge about the product and production technology diffuses quickly among firms in the area
Inter industry trade
Is when a country exports some products in trade for import of other quite different products
Intra industry trade (IIT)
A two way trade in which a country both exports and imports the same or very similar
How important is intra industry trade?
Intra industry trade is more important for non food manufactured products and also has a higher importance in high income countries where trade barriers and transport costs are low
Product differentiation
How consumers view the varieties of a product offered by different firms in an industry as close but not perfect substitutes to each other
Monopolistic completion has three main characteristics
The product offering of each firm is differentiated
There are some internal scale economies
Easy entry and exit of firms
The basis for exporting
Is that the domestic production of unique models are demanded by foreign consumers in the rest of the world
The basis for importing
The demand of domestic consumers for unique models produced by foreign firms
