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