Econ 4450 (2010) Note 8

Econ 4450 (2010) Note 8 - Econ 4450 Note 8 1 Case 3...

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Econ 4450 Note 8 1
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Case 3 Japan (and Korea) in Steel Industry Steel industry has its characteristics: (a)The heavy sunk cost in fixed equipment (b)The forward and backward linkage with the equipment sector and sectors like automobile and ship-building, machinery, etc. (c) The perceived link with national defense needs, and hence protective measures vs. imports by various countries (a)Progress in steel-making technology, but little investment (b)Differentiated outputs: basic and specialized (c)The QWERTY effect between steel and equipment sectors. 2
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From (a) and (d), the average cost and marginal cost (assuming it is constant for simplicity) is as follows. 3
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C q F m L Total cost 4
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C/q q m L M + F/q Average cost 5
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AC MC Capacity old q q 6
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AC MC AC MC Capacity Capacity old new q q p q 7
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AC MC AC MC Capacity Capacity old new q q Total D S p q 8
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AC MC AC MC Capacity Capacity old new q q Total D S q 9
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AC MC AC MC Capacity Capacity old new q q Total D S p q 10
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AC MC AC MC Capacity Capacity Old (loss) new q q Total D S p q 11
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AC MC AC MC Capacity Capacity Old (loss) New (profit) q q Total D S p q 12
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will result in a world supply curve where it may meet the demand and imply a unit price which is either break-even or profitable for the new producer, but below the cost for the old producer, even forcing it out, if it is below the marginal cost, according to the old technology. Such a situation makes the steel industry nominally ‘crowded’, ‘unprofitable’, and not appetizing to the investor, and hence new innovations would rarely be implemented. The limited
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Econ 4450 (2010) Note 8 - Econ 4450 Note 8 1 Case 3...

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