Define Constant Returns To Scale
When inputs to an industry increase at a certain
rate, output increases at the same rate
- If inputs were doubled, output would double as well.
Define Increasing Return To Scale (Economies of Scale)
This means that when inputs to an industry increase at a certain rate, output increases at a faster rate.
- A larger scale is more efficient: the cost per unit of output falls as a firm or industry increases output
What arise of a result in the economies of scales?
International trade permits each country to produce a limited range of goods without sacrificing variety in consumption. With trade, a country can take advantage of economies of scale to produce more efficiently than if it tried to produce everything for
What can Economies of Scale could mean?
It could mean either that larger firms or a larger industry would be more efficient.
Define External Economies of Scales
Occur when cost per unit of output depends on the size of the industry.
Define Internal Economies of Scale
Occur when the cost per unit of output depends on the size of a firm.
What are the important causes of international trade?
Both external and internal economies of scale because they have different implications for the structure of industries:
- An industry where economies of scale are purely external will typically consist of many small firms and be perfectly
competitive.
- I
What are the few reasons External Economies exist?
~Specialized equipment or services
~ Labor Pooling
~ Knowledge Spillovers
Ex) ilicon Valley in California has a large concentration of silicon chip companies, which are serviced by companies that make special machines for manufacturing silicon chips. Thes
Define Labor Pooling
A large and concentrated industry may attract a pool of workers, reducing employee search and hiring costs for each firm
Define Knowledge Spillovers
A workers from different firms may more easily share ideas that benefit each firm when a large and concentrated industry
exists.
Define Specialized Equipment or Service
The needed for the industry, but are only supplied by other firms if the industry is large and concentrated.
Define Forward-Falling Supply Curve
The larger the industry's output, the lower the price at which firms are willing to sell.
� Without international trade, the unusual slope of the supply curve doesn't matter
much.
What will happen when the countries open up the potential for trade in buttons?
The Chinese button industry will expand, while the U.S. button industry will contract.
� This process feeds on itself: As the Chinese industry's output rises, its costs will fall further; as the U.S. industry's output falls, its costs will rise.
� In the
How does this concentration of production affect prices?
Chinese button prices were lower than U.S. button prices before trade.
� Because China's supply curve is forward-falling, increased production as a result of trade leads to a button price that is lower than the price before trade.
� Trade leads to prices
What happens when relative price for cloth is cheap?
With external economies, by contrast, the effect of trade is to reduce prices everywhere.
What might cause one country to have an initial advantage from having a lower price?
One possibility is comparative advantage due to underlying differences in technology and resources.
� If external economies exist, however, the pattern of trade could be due to historical accidents:
- Countries that start as large producers in certain ind
What is not guarantee in external economies?
No guarantee that the right country will produce a good that is subject to external economies.
What is the ambiguous effect on external economies?
Trade based on external economies has an ambiguous effect on national welfare.
- There will be gains to the world economy by concentrating production of industries with external economies.
- It's possible that a country is worse off with trade than it wou
What is beneficial to the world on the economy?
The benefit of the world economy to take advantage of the gains from concentrating industries.
� Each country wanting to reap the benefits of housing an industry with economies of scale creates trade conflicts.
� Overall, it's better for the world that ea
Define Dynamic Increasing Returns To Scale
It exist if average costs fall as cumulative output over time rises.
- Dynamic increasing returns to scale imply dynamic external economies of scale.
Define Learning Curve
A graphical representation of dynamic increasing returns to scale
What could arise from a return of sales?
Dynamic increasing returns to scale could arise if the cost of production depends on the accumulation of knowledge and experience, which depend on the production process over time.
What can dynamic increasing returns to sale do on the industry?
Dynamic increasing returns to scale can lock in an initial advantage or a head start in an industry.
� Can also be used to justify protectionism.
- Temporary protection of industries enables them to gain experience: infant industry argument. But temporary
What could be important to External Economies?
External economies may also be important for interregional trade within a country.
- Many movie producers located in Los Angeles produce movies for consumers throughout the
U.S.
- Many financial firms located in New York provide financial services for con
What can cause external economies to exist with pattern of trade?
If external economies exist, the pattern of trade may be due to historical accidents:
- Regions that start as large producers in certain industries tend to remain large producers even if another region could potentially produce more
cheaply.
What does Economic Geography Refer too?
Economic geography refers to the study of international trade, interregional trade and the organization of economic activity in metropolitan and rural areas.
- Economic geography studies how humans transact with each other across space.
� Communication ch
What is not need of a result of comparative advantage?
Trade need not be the result of comparative
advantage. Instead, it can result from increasing returns or economies of scale, that is, from a tendency of unit costs to be lower with larger output.
What does Economies of Scale allow countries to do?
Economies of scale give countries an incentive to specialize and trade even in the absence of differences in resources or technology between
countries.
Explain the Internal & External Economies of Scale
Economies of scale can be internal (depending on the size of the firm) or external (depending on
the size of the industry)
What can Economies of Scale lead too?
Economies of scale can lead to a breakdown of perfect competition, unless they take the form of external economies, which occur at the level of
the industry instead of the firm.
What important role does the External Economies give?
External economies give an important role to
history and accident in determining the pattern of international trade
.
� When external economies are important, a country starting with a large advantage may retain that advantage even if another country coul
What happens when external economies are important?
It makes countries can conceivably lose from trade. Also the free trade price can fall below the price before trade in both countries.
Define Economic Geography
Economic geography refers to how humans
transact with each other across space, including through international trade and interregional trade.
What does External Economies of Scale Trade Based On?
The increase or decrease national welfare, and countries may benefit from temporary protectionism if their industries exhibit external economies of scale either at a point in time or over time.