lec09-eco101-11

lec09-eco101-11 - Lecture 9 c Marc-Andreas Muendler...

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International Trade Lecture 9 c Marc-Andreas Muendler University of California, San Diego October 25, 2011
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Classic Trade versus Intra-industry Trade Perfect competition does not prevail in practice. It can be caused by market imperfections or economies of scale Scale economies and increasing returns in production constitute a further reason for trade: Firms centralize production and export External economies of scale and externalities constitute a reason to restrict trade: Infant industries may deserve protection Imperfect competition is necessary to reward innovators and there- fore closely tied to endogenous growth
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Internal Economies of Scale Classic Trade Theory: Constant Returns to Scale Increasing Returns to Scale. Synonym: Internal Economies of Scale When all factors used in production are increased by b percent, output grows by more than b percent When output is increased by B percent, total costs grow by less than B percent (average costs decline) Production is more efficient at larger scale
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Constant Returns to Scale Capital Labor 0 Output Functional form: Y = L α K 1 - α (for α = 1 / 2 )
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Conventional Increasing Returns to Scale Capital Labor 0 Output Functional form: Y = L α K β (for α = β = 1 . 4 )
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Increasing Returns to Scale from Fixed Costs Capital Labor 0 Output Functional form: Y = L α K 1 - α - F (for α = 1 / 2 and F = 2 , 000 )
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Average Cost and Returns to Scale Increasing returns to scale are equivalent to decreasing average cost Constant returns to scale are equivalent to constant average cost Decreasing returns to scale are equivalent to increasing average cost Example. If there is a fixed cost, doubling all inputs results in more than a doubling of output because the fixed cost only needs to be paid once. So, average costs decrease and returns to scale increase
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9. Imperfect Competition and Market Segmentation Econ 101, c M. Muendler Trade under Internal Returns to Scale
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