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Chapter6 - Chap ter 6 Economies of Scale Imperfect...

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Chap ter 6: Economies of Scale, Imperfect Competition, and International Trade Previous models for comparative advantage assumed constant returns of scale Economies of scale = increasing returns Economies of scale is what most industries practice, so production is more efficient the larger the scale at which it takes place Economies of scale can provide an incentive for international trade If each country produces only some of the goods, then each good can be produced at a larger scale than would be the case if each country produced everything world economy can therefore produce more of each good Consumers will still want to consume a variety of goods international trade This makes it possible for each country to produce a restricted range of goods and to take advantage of economies of scale without sacrificing variety in consumption Economies of Scale and Market Structure It is important to know what kind of production increase is necessary to reduce AC in order to analyze the effects of economies of scale on the market structures External Economies of Scale: occurs when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm Internal economies of scale: occurs when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry External and internal economies of scale have different implications for the structure of industries
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An industry where economies of scare are purely external will typically consist of many small firms and be perfectly competitive Internal economies of scale give large firms a cost advantage over small and lead to an imperfectly competitive market structure The Theory of Imperfect Competition In imperfect competition firms can influence the prices of their products and can only sell more products by reducing their price Imperfect competition is characteristic of both of industries in which there are only a few major producers and of industries in which each producer’s product is seen by consumers as strongly differentiated from those of rival firms Each firm views itself as a price setter Monopoly: A brief Review The firm faces a downward sloping demand curve in a monopolistic firm, which indicates that the firm can sell more units of output only if the price of the output falls MR corresponds to demand curve For monopolists, MR is always less than the price b/c to sell an additional unit the firm must lower the price of all units MR always lies below the demand curve Marginal Revenue and Price Relationship b/w MR and price depends on two things: (1) on how much output the firm is already selling; a firm that is not selling very many units will not lose much by cutting the price it receives on those units (2) gap b/w price and MR depends on the slope of the demand curve, which tells us how much the monopolist has to cut his price to sell one more unit of output
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