No lecture just group assignment.
2023-10-27 Economics Chapter 7 for real this time:
see last class 2023-10-20 Economics Lecture Chapter 6 Internal Economies of Scale vs External Economies of Scale: Internal Economies of scale are dependent on the size for the firm, while external economies of scale are dependent on the industry as a whole . Ex. Silicon Valley: External while Ford: internal
Why do economies of scale exist when we can centralize production in one or a few locations?
External economies exist for a few reasons:
- Specialized equipment or services. An example of this is silicon valley, which has a large concentration of specialized technology to produce chips. This central location leads to a clustering of industry in the area, because these machines are cheaper and more easily available there then elsewhere
- Labor Pooling A large and concentrated industry attracts workers to the area. Like how every CS major wants a FANG job.
- Knowledge Spillover When all workers from various firms are in one concentrated place it is easier to share ideas that may be mutually beneficial.
-A simple model for economies of scale Represent External economies simply by assuming that the larger the industry, the lower the industries costs. If the firms produce more, the average cost of production goes down. In a perfectly competitive market, the price is linked to average price of production If you can lower the average costs of production, the firms lower prices. The prices can go down if it increases production. On the supply side, the supply curve shows relation between prices and output. Typically the supply is positively sloped. If price goes up, firms can produce more. This will result in a negative slope in this case. This is known as a forward falling supply curve and is equivalent to a average cost curve. The demand curve will remain negatively sloped. The slope of the AC and forward falling supply curve decreases as Q increases due to the presence of fixed costs. The forward falling supply curve doesn’t work in closed economies because there is only so many units demanded. Thus it works only in trading economies.
External Economies of Scale before Trade
In the US and China, they both produce buttons. If china can produce buttons cheaper at a baseline then they will produce more if the economies open to trade. This will result in a shift in the demand curve to the right and lower prices, further cementing china’s lead in the button market.
In other models: Exporting prices: relative prices go up Importing countries: relative prices go down
In the external economies model: Both exporting and importing countries have the relative prices go down.
This is the main difference between this model and the standard trade model.
What might cause a country to have an initial advantage from having a lower price. A few different factors:
- A difference of technology or resources
- Historical Accidents
Trade based on external economies has an ambiguous effect on national welfare. - There will be gains to the world economy by concentrating production of industries with external economies. - Its possible that a country is worse off with trade then it would have been without trade. A country may be better off if it produces everything for its domestic market rather then pay for imports.
Example: Thailand imports watches from Switzerland, which is able to supply the world market at a price low enough to block other countries from entering the market. However, if Thailand closes imports form Switzerland, they would be able to decrease prices due to a lower internal cost.
This ties in closely to Import Substituting Industrialization and the infant industry argument.