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Unformatted text preview: 1 1 Imperfect Competition and Trade Introd uction Economies of Scale The Monopoly Firm 2 Introduction Models of comparative advantage explain trade based on differences in productivity or resources between countries. These models are based on the assumptions of: Perfect competition , and Constant returns to scale . 3 Introduction Two features of international trade that cannot be explained by these models of comparative advantage are: 1. Trade between countries that have similar technologies and resource endowments . 2. The existence of intra-industry trade . 4 Introduction To explain these two features, models will be introduced that includes: Economies of scale, and Differentiated products . 2 5 Economies of Scale Economies of scale in production means that production at a larger scale can be achieved at a lower cost. Also referred to as: Increasing returns to scale , or Decreasing (average) cost . 6 Economies of Scale A Simple Example: Two countries: Home and Foreign Two goods: Cloth and Food Identical production technology in both countries. Identical resources in both countries. 7 Economies of Scale A Simple Example: Identical demands for both goods in both countries....
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