lecture note 7

The average cost of producing x falls improving

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Unformatted text preview: vity and efficiency. This leads to a welfare increase to U* in Figure 11.3. 14 Free trade may results in no net trade, but there may be considerable gross trade as firms invade one another’s markets. Free trade results in: (1) higher outputs per firm and lower average cost (2) lower consumer price (3) welfare gain Free Entry and Exit Effect 15 1. Suppose that there is free entry an exit of firms, so that the number of firms adjusts so that there are zero pure profits in equilibrium. 2. Put two identical countries together as before. All firms will have an incentive to expand as earlier, but now the “prisoners’ dilemma will mean that all firms now make losses. 2. Trade will have the “rationalizing” effect of reducing the number of firms in each country individually, but leaving the world economy with more firms in the end (more competition for the consumers). Example, Figure 11.4: each country has 10 firms in autarky. competition due to trade forced out 3 firms in each country. each country has 7 firm in free trade, but there are now 14 firms in competition with each other. Scale Economies I: Summary Points 16 1. With increasing-returns-to-scale technologies, trade and gains from trade can arise even between two identical economies. We could refer to this as "non-comparative-advantage trade". 2. There are several sources of gains from trade in the presence of scale economies and imperfect competition (initially distorted economies). (1) Pro-competitive effects lead firm to expand output toward a firstbest when the market expands through trade, reducing the distortion between price and marginal cost. (2) Individual firms move down their average cost curves, leading to an efficiency (productivity) effect. (3) Gains may also be captured in the form of the exit of some firms, therefore freeing up the resources that were used in fixed costs. WORLD MOTOR VEHICLE PRODUCTION OICA correspondents survey WITHOUT DOUBLE COUNTS WORLD RANKING OF MANUFACTURERS YEAR 2009 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 GROUP Total Total TOYOTA G.M. VOLKSWAGEN FORD HYUNDAI PSA HONDA NISSAN FIAT SUZUKI RENAULT DAIMLER AG CHANA AUTOMOBILE B.M.W. MAZDA CHRYSLER MITSUBISHI BEIJING AUTOMOTIVE TATA DONGFENG MOTOR FAW CHERY FUJI BYD SAIC ANHUI JIANGHUAI GEELY ISUZU BRILLIANCE AVTOVAZ GREAT WALL MAHINDRA SHANGDONG KAIMA PROTON CHINA NATIONAL VOLVO CHONGQING LIFAN FUJIAN KUOZUI SHANNXI AUTO PORSCHE ZIYANG NANJUN GAZ NAVISTAR GUANGZHOU AUTO PACCAR CHENZHOU JI'AO QINGLING MOTOR HEBEI ZHONGXING ASHOK LEYLAND 60,499,159 7,234,439 6,459,053 6,067,208 4,685,394 4,645,776 3,042,311 3,012,637 2,744,562 2,460,222 2,387,537 2,296,009 1,447,953 1,425,777 1,258,417 984,520 959,070 802,463 684,534 672,045 663,262 650,275 508,567 491,352 427,732 347,598 336,979 330,275 316,335 314,189 294,737 226,560 223,065 169,023 152,965 120,930 105,873 104,434 103,171 93,303 79,026 75,637 72,470 69,591 65,364 62,990 58,918 51,008 50,120 48,173 47,694 CARS 51,075,480 6,148,794 4,997,824 5,902,583 2,952,026 4,222,532 2,769,902 2,984,011 2,381,260 1,958,021 2,103,553 2,044,106 1,055,169 1,425,777 1,258,417 920,892 211,160 715,773 684,534 376,514 663,262 650,275 508,567 440,229 427,732 347,598 336,979 330,275 LCV 104,434 103,171 88,801 75,637 72,470 2,161 HEAVY BUS 7,817,520 927,206 1,447,625 154,874 1,681,151 324,...
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