Chapter 6 Economies of Scale. Imperfect Competition. and International Trade
Chapter 6 ▪ Economies of Scale,Imperfect Competition, and International Trade
Chapter Organization Introduction Economies of scale and International trade An overview Economies of scale and market structure The Theory of Imperfect Competition Monopolistic Competition and Trade Dumping a The Theory of External Economies External Economies and International Trade Summary Copyright C 2003 Pearson Education, Inc Slide 6-2
Copyright © 2003 Pearson Education, Inc. Slide 6-2 ▪ Introduction ▪ Economies of Scale and International Trade: An Overview ▪ Economies of Scale and Market Structure ▪ The Theory of Imperfect Competition ▪ Monopolistic Competition and Trade ▪ Dumping ▪ The Theory of External Economies ▪ External Economies and International Trade ▪ Summary Chapter Organization
Introduction Countries engage in international trade for two basic reasons Countries trade because they differ either in their resources or in technology. Countries trade in order to achieve scale economies or Increasing returns in production a Two models of international trade in which economies of scale and imperfect competition play a crucial role Monopolistic competition model ° Dumping model Copyright C 2003 Pearson Education, Inc Slide 6-3
Copyright © 2003 Pearson Education, Inc. Slide 6-3 Introduction ▪ Countries engage in international trade for two basic reasons: • Countries trade because they differ either in their resources or in technology. • Countries trade in order to achieve scale economies or increasing returns in production. ▪ Two models of international trade in which economies of scale and imperfect competition play a crucial role: • Monopolistic competition model • Dumping model
Economies of scale and International Trade: An overview Models of trade based on comparative advantage(e. g Ricardian model) used the assumptions of constant returns to scale and perfect competition Increasing the amount of all inputs used in the production of any commodity will increase output of that commodity in the same proportion In practice, many industries are characterized b economies of scale(also referred to as increasing returns) Production is most efficient, the larger the scale at which it takes place Copyright C 2003 Pearson Education, Inc Slide 6-4
Copyright © 2003 Pearson Education, Inc. Slide 6-4 Economies of Scale and International Trade: An Overview ▪ Models of trade based on comparative advantage (e.g. Ricardian model) used the assumptions of constant returns to scale and perfect competition: • Increasing the amount of all inputs used in the production of any commodity will increase output of that commodity in the same proportion. ▪ In practice, many industries are characterized by economies of scale (also referred to as increasing returns). • Production is most efficient, the larger the scale at which it takes place
Economies of scale and International Trade: An overview Under increasing returns to scale Output grows proportionately more than the Increase in all inputs Average costs(costs per unit) decline with the size of the market Copyright C 2003 Pearson Education, Inc Slide 6-5
Copyright © 2003 Pearson Education, Inc. Slide 6-5 ▪ Under increasing returns to scale: • Output grows proportionately more than the increase in all inputs. • Average costs (costs per unit) decline with the size of the market. Economies of Scale and International Trade: An Overview
Economies of scale and International Trade: An overview Table 6-1: Relationship of Input to Output for a Hypothetical Industry Output Total Labor Input Average Labor Input 10 15 15 20 1333333 20 1.25 25 30 1.2 35 166667 Copyright C 2003 Pearson Education, Inc Slide 6-6
Copyright © 2003 Pearson Education, Inc. Slide 6-6 Economies of Scale and International Trade: An Overview Table 6-1: Relationship of Input to Output for a Hypothetical Industry
Economies of scale and Market structure Economies of scale can be either External The cost per unit depends on the size of the industry but not necessarily on the size of any one firm An industry will typically consist of many small firms and be perfectly competitive e Internal The cost per unit depends on the size of an individual firm but not necessarily on that of the industry The market structure will be imperfectly competitive with large firms having a cost advantage over small Both types of scale economies are important causes of international trade Copyright C 2003 Pearson Education, Inc Slide 6-7
Copyright © 2003 Pearson Education, Inc. Slide 6-7 Economies of Scale and Market Structure ▪ Economies of scale can be either: • External – The cost per unit depends on the size of the industry but not necessarily on the size of any one firm. – An industry will typically consist of many small firms and be perfectly competitive. • Internal – The cost per unit depends on the size of an individual firm but not necessarily on that of the industry. – The market structure will be imperfectly competitive with large firms having a cost advantage over small. • Both types of scale economies are important causes of international trade
The Theory of Imperfect Competition Imperfect competition Firms are aware that they can influence the price of their product They know that they can sell more only by reducing their price Each firm views itself as a price setter, choosing the price of its product, rather than a price taker The simplest imperfectly competitive market structure is that of a pure monopoly, a market in which a firm faces no competition Copyright C 2003 Pearson Education, Inc Slide 6-8
Copyright © 2003 Pearson Education, Inc. Slide 6-8 ▪ Imperfect competition • Firms are aware that they can influence the price of their product. – They know that they can sell more only by reducing their price. • Each firm views itself as a price setter, choosing the price of its product, rather than a price taker. • The simplest imperfectly competitive market structure is that of a pure monopoly, a market in which a firm faces no competition. The Theory of Imperfect Competition
The Theory of Imperfect Competition Monopoly: A Brief Review ° Marginal revenue The extra revenue the firm gains from selling an additional unit Its curve, MR, always lies below the demand curve. D In order to sell an additional unit of output the firm must lower the price of all units sold(not just the marginal one) Copyright C 2003 Pearson Education, Inc Slide 6-9
Copyright © 2003 Pearson Education, Inc. Slide 6-9 ▪ Monopoly: A Brief Review • Marginal revenue – The extra revenue the firm gains from selling an additional unit – Its curve, MR, always lies below the demand curve, D. – In order to sell an additional unit of output the firm must lower the price of all units sold (not just the marginal one). The Theory of Imperfect Competition
The Theory of Imperfect Competition Figure 6-1: Monopolistic Pricing and Production Decisions Cost, C and Price. P Monopoly profits AC AC MC MR M Quantity, Q Copyright C 2003 Pearson Education, Inc Slide 6-10
Copyright © 2003 Pearson Education, Inc. Slide 6-10 The Theory of Imperfect Competition Figure 6-1: Monopolistic Pricing and Production Decisions D Cost, C and Price, P Quantity, Q Monopoly profits AC PM QM MR MC AC