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14 External Econ - External Economies and Trade Introduction and Assumptions The Theory of External Economies of Scale External Economies and Trade

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1 1 External Economies and Trade • Introduction and Assumptions • The Theory of External Economies of Scale • External Economies and Trade • Trade and Welfare • Dynamic Increasing Returns 2 Introduction • When economies of scale apply at the level of the industry rather than at the level of the individual firm, they are called external economies . 3 Assumptions Assumption #1: The are many firms . 4 Assumptions Assumption #2: Each firm produces a slightly differentiated product .
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2 5 Assumptions Assumption #3: There are economies of scale in production which are external to the firm . 6 Assumptions Assumption #4: The external economies of scale model is a partial equilibrium model. 7 Theory of External Economies Three main reasons why a cluster of firms (an industry) may be more efficient than an individual firm in isolation. 1. The ability to support specialized suppliers . 2. The ability to allow labor market pooling . 3. The ability to foster knowledge spillovers . 8 Theory of External Economies 1. Specialized Suppliers : –A n individual company in isolation does not provide a large enough market for specialized service suppliers to stay in business. localized industrial cluster can solve this problem by bringing together many firms that collectively provide a large enough market to support a wide range of specialized suppliers.
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3 9 Theory of External Economies 2. Labor Market Pooling : A cluster of firms can create a pooled market for workers with highly specialized skills.
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This note was uploaded on 02/09/2011 for the course ECON 181 taught by Professor Kasa during the Fall '07 term at University of California, Berkeley.

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14 External Econ - External Economies and Trade Introduction and Assumptions The Theory of External Economies of Scale External Economies and Trade

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