W5 - Economies of scale

what type of theory is external eos?

new trade theory

internal EOS

cost per unit grows with firm size

external EOS

cost per unit grows with industry size

EVAL of classical models (2)

assume that returns to scale are constant

assumes trade is always positive for an economy

why might small firms be able to remain competitive in external EOS

industry clustering

reasons for external economies (3)

1. Specialised equipment or services e.g. cars

2. Labour pooling reduces search hiring costs

3. Knowledge spillovers

external EOS model composed of

forward falling supply curve and output based on average cost which determines price

how might trade benefit industries with external eos? explain and draw graph

previously faced only Chinese demand curve and now face world demand curve in which increase in Q is greater than price decrease so they profit

how does external economies affect prices

lower prices in all countries rather than converging, that is, increasing in home and reducing in foreign

path dependency

most suitable countries dont always specialise due to established reputation and relationships and economies of agglomeration e.g. vietnam cheaper than china

how might governments ensure their economies are better off

infant industry argument and subsidising them to protect them from world demand curve