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1、Chapter 7,External Economies of Scale and the International Location of Production,7-2,Preview,Types of economies of scale Economies of scale and market structure The theory of external economies External economies and international trade Dynamic increasing returns International trade and economic g
2、eography,7-3,Introduction,The models of comparative advantage thus far assumed constant returns to scale: When inputs to an industry increase at a certain rate, output increases at the same rate. If inputs were doubled, output would double as well.,7-4,Introduction (cont.),But there may be increasin
3、g returns to scale or economies of scale: This means that when inputs to an industry increase at a certain rate, output increases at a faster rate. A larger scale is more efficient: the cost per unit of output falls as a firm or industry increases output.,7-5,Introduction (cont.),For example, suppos
4、e an industry produces widgets using only one input, labor. Consider how the amount of labor required depends on the number of widgets produced. The presence of economies of scale may be seen from the fact that doubling the input of labor more than doubles the industrys output. the average amount of
5、 labor used to produce each widget is less when the industry produces more.,7-6,Table 7-1: Relationship of Input to Output for a Hypothetical Industry,7-7,Introduction (cont.),Mutually beneficial trade can arise as a result of economies of scale. International trade permits each country to produce a
6、 limited range of goods without sacrificing variety in consumption. With trade, a country can take advantage of economies of scale to produce more efficiently than if it tried to produce everything for itself.,7-8,Economies of Scale and Market Structure,Economies of scale could mean either that larg
7、er firms or a larger industry would be more efficient. External economies of scale occur when cost per unit of output depends on the size of the industry. Internal economies of scale occur when the cost per unit of output depends on the size of a firm.,7-9,Economies of Scale and Market Structure (co
8、nt.),Both external and internal economies of scale are important causes of international trade. They have different implications for the structure of industries: An industry where economies of scale are purely external will typically consist of many small firms and be perfectly competitive. Internal
9、 economies of scale result when large firms have a cost advantage over small firms, causing the industry to become imperfectly competitive.,7-10,The Theory of External Economies,This chapter deals with a model of external economies; the next chapter will cover internal economies. Many modern example
10、s of industries that seem to be powerful external economies: In the United States, the semiconductor industry is concentrated in Silicon Valley, investment banking in New York, and the entertainment industry in Hollywood.,7-11,The Theory of External Economies (cont.),In developing countries such as
11、China, external economies are pervasive in manufacturing. One town in China produces most of the worlds underwear, another nearly all cigarette lighters. External economies played a key role in Indias emergence as a major exporter of information services. Indian information services companies are st
12、ill clustered in Bangalore.,7-12,The Theory of External Economies (cont.),For a variety of reasons, concentrating production of an industry in one or a few locations can reduce the industrys costs, even if the individual firms in the industry remain small. External economies may exist for a few reas
13、ons:,7-13,The Theory of External Economies (cont.),Specialized equipment or services may be needed for the industry, but are only supplied by other firms if the industry is large and concentrated. For example, Silicon Valley in California has a large concentration of silicon chip companies, which ar
14、e serviced by companies that make special machines for manufacturing silicon chips. These machines are cheaper and more easily available there than elsewhere.,7-14,The Theory of External Economies (cont.),Labor pooling: a large and concentrated industry may attract a pool of workers, reducing employ
15、ee search and hiring costs for each firm. Knowledge spillovers: workers from different firms may more easily share ideas that benefit each firm when a large and concentrated industry exists.,7-15,The Theory of External Economies (cont.),Represent external economies simply by assuming that the larger
16、 the industry, the lower the industrys costs. There is a forward-falling supply curve: the larger the industrys output, the lower the price at which firms are willing to sell. Without international trade, the unusual slope of the supply curve doesnt matter much.,7-16,External Economies and International Trade,Prior to international trade, equilibrium prices and output for each country would be at the point where the domestic supply curve intersects the domestic demand curve. Suppose Chinese but
