Short 5 - E 101 Short Note 5 Economies of Scale Trade...

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1 E 101: Short Note – 5. Economies of Scale & Trade (* Lectures are mainly based on our textbook, Krugman’s International Economics: Theory and Policy. Thorough reading of the text in addition to active participation in classes is strongly recommended. This note is just a short list of topics we discuss in class for your reference.) II. New Trade Theory: Imperfect Competition & Trade 1. Imperfect competition and intra-industry trade O Source of Imperfect Competition: Economies of Scale External economies of scale occur when cost per unit of output depends on the size of the industry . Internal economies of scale occur when the cost per unit of output depends on the size of a firm .
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2 External economies of scale may result if a larger industry allows for more efficient provision of services or equipment to firms in the industry. Many small firms that are competitive may comprise a large industry and benefit from services or equipment efficiently provided to the large group of firms. Internal economies of scale result when large firms have a cost advantage over small firms, which leads to an imperfectly competitive market.
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3 1) Monopolistic Competitive Market Monopolistic competition is a model of an imperfectly competitive industry which assumes that Each firm can differentiate its product from the product of competitors. Each firm ignores the impact that changes in its own price will have on the prices competitors set: even though each firm faces competition it behaves as if it were a monopolist.
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4 A firm in a monopolistically competitive industry is expected:
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This note was uploaded on 10/01/2008 for the course ECON 101 taught by Professor Jacobson during the Summer '03 term at UCSD.

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Short 5 - E 101 Short Note 5 Economies of Scale Trade...

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