W7 - Firms in global economy + MELITZ model

internal EOS Symmetry assumtpion (2)

assumes all firms face same costs and external factors

assumes MC is constant

markup formula

Quantity x price / mc

Melitz model argues that

only most productive firms survive, that is, low MC, and trade exposes these differencex

profit formula

markup x Q

marginal cost and profit relationship?!

negative

how does trade impact demand curve - plot on graph

lowers threshold for acceptable marginal cost (intercept) that remains competitive and flattens slope

how does trade impact small and large firms

Firms producing less than Qi now face less generous demand curve

Why might firms not export?!

Trade costs add to marginal cost and reduce profitability 

Firms faced with two decisions

how much to produce at home and how much to export

melitz model example

brexit and increased tariffs for UK/EU firms marginal cost