Flashcards
Imperfect Competition
Cards in this deck (26)
- 1What is external economies of scale?Cost per unit depends on the size of the industry but not necessarily on the size of any one firm
Does not lead to imperfect competition - 2What is internal economies?Cost per unit depends on the size of an individual firm but not necessarily on the size of the market.
- 3Why does internal economies of scale lead to imperfect competition?AC decreases as the size of the firm increases
Large firms have a cost advantage over small firms, small firms will exit the market - 4How does economies of scale drive international trade?A firm can increase output by scaling up. As they do so, the average cost declines. This requires resources to move from other industries. Goods from abandoned industries will be imported
- 5What does external economies of scale look like?Typically consists of many small firms on a perfectly competitive market. Geographical concentrations of industry not explained by natural resources.
- 6Why does external economies arise?Specialised suppliers
Labour market pooling
Knowledge spillovers - 7Illustrate why trade will concentrate production in China, not the US, if China has a lower AC before tradeSee notes (external economies of scale)
- 8What is the result of achieving external economies of scale (production concentrated in one country)Lower prices than in any country before trade
Output increases - 9How can historical events explain external economies of scale, even if another country would be more productive?The more productive country's AC at Q=0 is above current market price. They will not enter the market
- 10When is it possible that external economies of scale makes a country worse off? Illustrate graphicallyIf the country could have produced the good more cheaply itself, but someone else got there first:
Initial price at Q=0 is higher than current market price - 11What is dynamic increasing returns and why is it important for external economies of scale?Dynamic increasing returns imply that cost falls with cumulative production over time rather than with current rate of production.
There is a learning curve based on experience. A country with a lower learning curve (more productive) will not enter the market if another country has already achieved a market price below their initial cost - 12What does the internal economies of scale allow for?Differentiated products
Performance measures (size, profit) vary across firms - 13What determines the number of firms in monopolistic competition?Depends on how quickly market is saturated, there is incentive to enter as long as entry is profitable
- 14How is price determined by monopolistic firms?Firms set prices according to market
No incentives to charge prices differently - 15Show how Q becomes Q=S/n when all firms charge the same priceSee notes
- 16What is CC and PP?CC: AC = (n*/FS)+c
PP: P = c+1/(bn) - 17Why does trade in monopolistic economy lead to mutual gain even if countries' resources or technology is identical?Trade allows for specialisation, they can consume wider variety of goods
Larger markets allow for:
More firms
More sales per firm
Lower prices
Greater variety of goods - 18Graphically show how trade (larger S from more consumers) lead to lower prices and more firmsSee notes (monopolistic competition and trade)
- 19What are some important differences from Ricardian and H-O?Trade between countries with no comparative advantage differences (intra-industry trade)
Two new channels of welfare benefits from trade
(greater variety of goods, lower prices) - 20What is intra-industry trade and inter-industry trade?Intra-industry: two-way exchange of similar goods, important when countries are similar. Important in manufactured goods among advanced industrial nations. Weaker effect on income distribution = more political support
Inter: reflects differences in comparative adv. - 21Illustrate which firms gains and which firms loses from tradeSee notes (firms responses to trade)
- 22What happens to prices home and abroad if there are trade costs? Who will still export?Price will be higher abroad.
Only firms with lower MC will export:
C - 23What is dumping?A form of price discrimination, the goal is to achieve competitive adv. A firm sets its export price lower than its domestic price. Dumping is considered unfair in the Foreign country and can lead to anti-dumping duty being imposed on the exporting firm.
- 24What is horizontal FDI?The affiliate replicated the production process. Tends to be developed countries with similar factor prices. Allows a firm to avoid the trade cost of exporting to that country.
- 25When is horizontal FDI profit maximising?Q>F/t
If not, export is better - 26What is vertical FDI?Part of production moved to affiliate. Driven by production cost differences from comparative advantage.
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- International Economics Flashcards on Imperfect Competition, created by Linnéa Ekberg on 21/10/2018.
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- Linnéa Ekberg
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