krugman_PPT_c06.pptVIP

Chapter 6 Economies of Scale, Imperfect Competition, and International Trade Preview Types of economies of scale a review of monopoly Monopolistic competition Monopolistic competition and trade Inter-industry trade and intra-industry trade Dumping(not required) External economies of scale and trade(not required) Introduction When defining comparative advantage, the Ricardian model and the Heckscher-Ohlin model both assume constant returns to scale: If all factors of production are doubled then output will also double. But a firm or industry may have increasing returns to scale If all factors of production are doubled, then output will more than double. Larger is more efficient: the cost per unit of output falls as a firm or industry increases output. Introduction (cont.) The Ricardian and Heckscher-Ohlin models all rely on competition to predict that all income from production is paid to owners of factors of production: no “excess” or monopoly profits exist. But when economies of scale exist, large firms may be more efficient than small firms, and the industry may consist of a monopoly or a few large firms. Production may be imperfectly competitive in the sense that excess or monopoly profits are captured by large firms. Types of Economies of Scale Economies of scale could mean either that larger firms or that a larger industry (e.g., one made of more firms) is more efficient. External economies of scale occur when cost per unit of output depends on the size of the industry. some example? Internal economies of scale occur when the cost per unit of output depends on the size of a firm. exercise External economies of scale arise when the cost per unit (a) rises as the industry grows larger. (b) falls as the industry grows larger rises as the average firm grows larger. (c) falls as the average firm grows larger. (d) remains constant. (e) None of the above. Internal economies of scale arise when the cost per unit (a) rises as the industry grows larger. (b) falls as