22.06.2023 Economies of Scale#

Economies of Scale: Outputs in Industry increase faster than inputs increase => more efficient production

External Economies of Scale#

Increase depends on industry size

  • mostly smaller firms

  • highly competitive region = better products

Reasons for ext. EOS:

  • specialized equipment

  • labor pooling

  • knowledge spillover

Effects with Trade

  • two countries with one industry

  • one cheaper to begin with = more production there

  • as more goes to one country = ever lower prices

  • in the end: all production in one country

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=> reduce prices everywhere (as compared to in the middle of countries)

But:

  • if one country has head start

  • cheaper countries cant get enough demand

  • even though less costly

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Dynamic increasing returns#

external EOS = also depend on cumulative output

  • more demand = more research

  • more knowledge = cheaper products

=> learning curve (e.g solar panels very prominent)

Theory

Practice

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note: EOS can giv arguments for protection of industries at infant stage! or to get a headstart!