7_3150_irs - Chapter 12 Increasing Returns to Scale Econ...

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Unformatted text preview: Chapter 12 Increasing Returns to Scale Econ 3150 York U 1 Increasing returns to Scale 1. External Economies of Scale 2. Internal Economies of Scale 2.1 Model 2.2 Pro-competitive gains Profit effect Decreasing average cost effect 2.3 Other effects Firm exit Product diversity Specialized Inputs Chapter 12 Increasing Returns to Scale Econ 3150 York U 2 higher output -> lower per unit costs of production (higher efficiency) 1. External Economies of Scale Increase in industry output Increase in efficiency of individual plants (more plants in an industry > & develop specialized suppliers networks & knowledge spillovers & improved industry specific infrastructure e.g. Silicon Valley) (unit costs of production are reduced) Assume: 1 input: labour MPL x =MPL y = 1 Chapter 12 Increasing Returns to Scale Econ 3150 York U 3 both X and Y have external IRS in production Recall: no IRS, 1 factor => PPF is straight line. (Move 1 unit of labour from X to Y output in X falls by 1, output in Y increases by 1). External IRS => convex PPF. (To see it, start at point A where X = Y , move 1 unit of labour from Y to X ; X now has scale advantage, output of X goes up by more than 1.) X Y 45 O A 2 2 3 1 3.3 X Y C Chapter 12 Increasing Returns to Scale Econ 3150 York U 4 Assume H and F have identical preferences, and consumers value X and Y equally => if there is no trade, both H and F consume at point A. If economies open to trade and Home specializes in Y and Foreign specializes in X => both countries enjoy economies of scale. Home produces Y , Foreign produces X , H and F exchange along X Y . Both countries consume at C and get higher utility than in autarky. Note that if there are no IRS, economies do not gain from trade. What if the tastes for goods X and Y differ? E.g. consumers in both countries want to consume more of X => there is excess demand for X , excess supply of Y => relative price of X is higher. Home output has relatively less value than foreign. Chapter 12 Increasing Returns to Scale...
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7_3150_irs - Chapter 12 Increasing Returns to Scale Econ...

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