1

Chapter 6Chapter 6

Economies of ScaleEconomies of Scale （（规模经济规模经济）） , Imperfect , Imperfect

Competition, and International TradeCompetition, and International Trade

2

Models of trade based on comparative advantage (the past four chapters) used the assumptions of constant returns to scale and perfect competition.

In practice, many industries are characterized by economies of scale and imperfect competition : Production is most efficient, the larger the scale at which it takes place.

3

In chapter 6 we discuss Economies of scale, Imperf

ect Competition and international trade

4

Chapter Organization

• an overview• Economies of Scale and Market Structure• The Theory of Imperfect Competition• Monopolistic Competition and Trade• Dumping• The Theory of External Economies• External Economies and International Trade

5

一、 Economies of Scale and international trade: an overview

A simple example can help convey the significance of economies of scale for international trade.

Imagine a world consisting of two countries, A and B, both of them produce 10 good 1 and 10 good 2, require 30 hours of labor in each countries.

6

Under increasing returns to scale:

– Output grows proportionately more than the increase in all inputs.

– Average costs (costs per unit) decline with the size of the market.

7

Table 6-1: Relationship of Input to Output for a Hypothetical( 假设 ) Industry

8

How does international trade enter the story?

It makes it possible for each country to produce a restricted range of goods (A for good 1, B for good 2) and to take advantage of economies of scale without sacrificing variety in consumption by trading each other.

9

二、 Economies of Scale and Market Structure

Unfortunately, to go from this suggestive story to an explicit model of trade based on economies of scale is not that simple.

The reason is that economies of scale lead to a market structure which we must analyze first.

10

1. External Economies of scale( 外部规模经济 ) with market structure

External economies of scale shows that the cost per unit depends on the size of the industry but not necessarily on the size of any one firm.

An industry will be perfectly competitive. Because there are no advantages to large firms and there are so many small firms.

11

2. Internal Economies of scale ( 内部规模经济 ) with market structure

Internal Economies of scale shows that the cost per unit depends on the size of an individual firm but not necessarily on that of the industry.

The market structure will be imperfectly competitive. Because it give large firms a cost advantage over small and lead to an imperfectly competitive market structure.

12

Both types of scale economies are important causes of international trade.

Because they have different implications for market structure, we will therefore deal with them one at a time.

We begin with a model based on internal economies of scale.

13

三、 The Theory of Imperfect Competition

Internal Economies of scale lead to breakdown of perfect competition.

So we should take time out to review the economics of imperfect competition before we can turn to the analysis of the role of internal economies of scale in international trade.

14

1. Imperfect competition

– Firms are aware that they can influence the price of their product(They know that they can sell more only by reducing their price).

– Each firm views itself as a price setter, choosing the price of its product, rather than a price taker.

– Such as Boeing and Airbus.

15

The simplest imperfectly competitive market st

ructure is that of a pure monopoly ( 纯粹垄断 ),

a market in which a firm faces no competition.

16

2. Monopoly: A Brief Review

Figure 6-1 below shows a monopolistic firm.

17

Figure 6-1: Monopolistic Pricing and Production Decisions

D

Cost, C andPrice, P

Quantity, Q

Monopoly profits

AC

PM

QM

MR

MC

AC

18

1) Marginal revenue( 边际收益 )

Marginal revenue is the extra revenue the firm gains from selling an additional unit.

Its curve, MR, always lies below the demand curve, D--------------why ？

In order to sell an additional unit of output the firm must lower the price of all units sold (not just the marginal one).

19

2) Marginal Revenue and Price

Marginal revenue is always less than the price

The relationship between marginal revenue and price depends on two things:

How much output the firm is already selling (more sales, more losses by price cut)

The slope of the demand curve( how much the monopolist has to cut his price to sell one more unit of output).

20

Assume that the demand curve the firm faces is a straight line:

Q = A – B x P (6-1)

A and B are constants, It means that the more Q, the lower P

21

Then the MR that the firm faces is given by(to see the appendix of this chapter):

MR = P – Q/B (6-2)

It means that the higher Q, the lower MR.

22

3) Average and Marginal Costs

Average Cost (AC) is total cost divided by output.

Marginal Cost (MC) is the amount it costs the firm to produce one extra unit.

When average costs decline in output, marginal cost is always less than average cost.

23

Figure 6-2: Average Versus Marginal Cost

Average cost

Marginal cost1

2

0

3

4

5

6

2 4 6 8 10 12 14 16 18 20 22 24

Cost per unit

Output

Average cost declines as output rises, and approaches MC at very large output

24

Suppose the costs of a firm, C, take the form:

C = F + c x Q (6-3)

This is a linear cost function(c is MC).

The fixed cost(F) in a linear cost function gives rise to economies of scale, because the larger the firm’s output, the less is fixed cost per unit.

The firm’s average costs is given by:

AC = C/Q = F/Q + c (6-4)

25

3. Monopolistic Competition( 垄断竞争 )

Monopoly profits rarely go uncontested and attracts competitors. So the usual market structure is oligopoly.

Oligopoly （寡头垄断） :

There are several firms, each of which is large enough to affect prices, but none with an uncontested monopoly.

26

Strategic interactions among oligopolists have become important: Each firm decides its own actions, taking into account how that decision might influence its rival’s actions.

27

Monopolistic competition is a special case of oligopoly, in its models two key assumptions are made to get around the problem of interdependence:

Each firm is assumed to be able to differentiate its product from its rivals.

Each firm is assumed to take the prices charged by its rivals as given.

28

Are there any monopolistically competitive industries in the real world?

Some industries may be reasonable approximations (e.g., the automobile industry in Europe)

The main appeal of the monopolistic competition model is not its realism, but its simplicity.

29

1) Assumptions of the Model

Imagine an industry consisting of a number of firms producing differentiated products.

We expect a firm:

To sell more the larger the total demand for its industry’s product and the higher the prices charged by its rivals

To sell less the greater the number of firms in the industry and the higher its own price

30

2) A particular equation for the demand facing a firm that has these properties is:

Q = S x [1/n – b x (P – P)] (6-5)

Q is the firm’s sales; S is the total sales of the industry; n is the number of firms in the industry; b is a constant term representing the responsiveness of a firm’s sales to its price; P is the price charged by the firm itself; P is the average price charged by its competitors

ˉ

ˉ

31

Equation (6-5) tell us that if all firms charge

the same price, each will have a market share

1/n.

A firm charging more than the average of

other firms will have a smaller market share,

a firm charging less a larger share.

32

3) Market Equilibrium

All firms in this industry are symmetric: The demand function and cost function are identical for all firms.

To analyze the industry, we need the method for determining the number of firms and the average price charged which involves three steps:

33

First:

We derive a relationship between the number of firms and the average cost of a typical firm, it is upward sloping, the more firms, the lower output, the higher cost. -----------CC

Second:

We derive a relationship between the number of firms and the price each firm charges, it is downward sloping, the more firms, the more competition, the lower prices. --------PP

34

Third:

The equilibrium number of firms is determined by the intersection of the curve CC and PP.

We derive the equilibrium number of firms and the average price that firms charge, the price determines the firms to enter or exit the industry.

35

PP

Cost C, andPrice, P

Numberof firms, n

CC

P3

AC3

n3n1

AC1

n2

AC2

E

Figure 6-3: Equilibrium in a Monopolistically Competitive Market

P2,

P1

36

The number of firms and average cost

We conclude that average cost depends on the size of the market and the number of firms in the industry:

AC = F/Q + c = n x F/S + c (6-6)

The more firms there are in the industry, the higher is the average cost.

37

Profit-maximizing firms set marginal revenue equal to their marginal cost, c.

This generates a negative relationship between the price and the number of firms in the market which is the PP curve:

P = c + 1/(b x n) (6-10)

The more firms there are in the industry, the lower the price each firm will charge.

38

The meaning of PP and CC:

The downward-sloping curve PP shows that the more firms, the lower the price each firm will charge.

The more firms, the more competition each firm faces.

39

The upward-sloping curve CC tells us that the more firms there are, the higher the average cost of each firm.

If the number of firms increases, each firm will sell less, so firms will not be able to move as far down their average cost curve.

40

The equilibrium number of firms:

The two schedules intersect at point E, point E describes the industry’ long-run equilibrium , corresponding to the number of firms n2 which is the equilibrium number of firms.

Because firms(n1 or n3) will enter the industry that is profitable or exit one in which they lose money when firms charge the P1 or P3.

41

We can use a model of a monopolistically competitive industry to derive some important conclusions about the role of economies of scale in international trade.

42

4) Limitations of the Monopolistic Competition Model

Two kinds of behavior arise in the general oligopoly setting that are excluded by assumption from the monopolistic competition model:

43

Collusive behavior （共谋行为） :

Each firm may keep of price higher than the apparent profit-maximizing level as part of an understanding that other firms will do the same.

44

Collusive behavior can raise the profits of all firms at the expense of consumers

Collusive behavior may be managed through explicit agreements or through tacit coordination strategies

45

Strategic behavior （战略行为） :

Such as a firm may build extra capacity not to use it but to deter （阻止） potential rivals from entering its industry

It is adopted by firms to affect the behavior of competitors in a desirable way

46

After discussing monopolistic competition, we should learn the relationships between monopolistic competition model and trade.

47

四、 Monopolistic Competition and Trade

1. The roles of trade in monopolistic competition model

1) Trade leads to a lower average price due to scale economies

2) Trade leads to the availability of a greater variety of goods due to product differentiation

48

3) Trade leads to Imports and exports within each industry (intra-industry trade)

4) Trade leads to Integrating market or larger market

49

Case study

The trend of integrated market in the world.

50

按照 WTO 的统计，截至 2003 年 10 月，向 WTO ／ GATT 通告的区域贸易协定数量已经达到了 285 项，其中尚在实施的有 189 项。此外，有 60 项协定虽然没有向 WTO 通告，但已经开始实施。

依据区域贸易协定生效的时间划分，超过一半是在 WTO 时代 (1995 年以后 )完成的；而在 GATT 时代完成的 124 项中，尚在实施的只有 48 项。

51

2. The Effects of Increased Market Size

1) The number of firms in a monopolistically competitive industry and the prices they charge are affected by the size of the market.

2) An increase in the size of the market allows each firm to produce more and have lower average cost, lower prices.

52

3) This is represented by downward shift from CC1 to CC2 (given by equation (6-6): AC = F/Q + c = n x F/S + c).

53

Figure 6-4: Effects of a Larger Market

Cost C, andPrice, P

Numberof firms, n

CC1

n1

P1

1

PP

n2

P2

2

CC2

54

Case study

Autos and economies of scaleeconomies of scale in US and China.

55

福特汽车与规模经济

福特汽车公司由亨利 · 福特先生创立于 1903 年，是世界上最大的汽车企业之一。 1908 年，福特汽车公司生产出世界上第一辆属于普通百姓的汽车—— T 型车，世界汽车工业革命就此开始。 1913 年，福特汽车公司又开发出了世界上第一条流水线，这一创举使 T 型车一共达到了 1,500 万辆，缔造了一个至今仍未被打破的世界记录。福特先生为此被尊为“为世界装上轮子”的人。

以福特 T 型汽车为例，在 1909 年价格为950 美元，之后由于产量上升，成本下降，到 1924 年停产时，已经降到了 300 美元。

56

北京现代伊兰特与规模经济

2004 年 9 月北京现代汽车销量比上月增长 23% ，达到 15570 辆，再创历史新高，其中伊兰特销量更达到 12087 辆，稳居中级轿车第一名的位置。

相对于去年 5 万辆的产能，今年 15 万辆的产能可使北京现代每辆车的固定成本下降三分之一，明年北京现代的产能将扩大到 30 万辆，单车成本还将继续下降，竞争优势也将随之增加。

57

3. Gains from an Integrated Market （一体化市场）

1) International trade allows creation of an integrated market that is larger than each country’s market.

It thus becomes possible to offer consumers a greater variety of products and lower prices--gains from an Integrated Market.

58

2) A Numerical Example:

Suppose that automobiles are produced by a monopolistically competitive industry.

There are two countries (Home and Foreign) that have the same costs of automobile production.

59

Annual sales of automobiles are 900,000 at Home and 1.6 million at Foreign.

b = 1/30,000 ; F = $750,000,000; c = $5000

This creates two markets in Home and Foreign which showed by panel a and panel b in Figure 6-5.

PP curves------------------PP = c + 1 / ( b × n )

CC curves------------------CC = F / Q ＋ c

60

Figure 6-5: Equilibrium in the Automobile Market

61

Figure 6-5: Continued

62

Now suppose it is possible for Home and Foreign to trade automobiles costlessly with one another. This creates a new, integrated market(panel c in Figure 6-5).

（ Annual sales of automobiles are 900,000 at Home and 1.6 million at Foreign ）

63

Figure 6-5: Continued

64

By drawing the PP curves and CC curves one more time, we find that this integrated market supports more firms, each producing a larger scale and selling at a lower price than either national market did on its own.

65

66

Table 6-2: Hypothetical Example of Gains from Market Integration

67

In the larger market, consumers have a wider range of choice, yet each firm produces more and is therefore able to offer its product at a lower price.

68

Now we think about how economies of scale interact with comparative advantage to determine the pattern of international trade.

4. Economies of Scale and Comparative Advantage (pattern of international trade)

69

1) Assumptions:

There are two countries: Home (the capital-abundant country) and Foreign.

There are two industries: manufactures (the capital-intensive industry) and food.

Neither country is able to produce the full range of manufactured products by itself due to economies of scale.

70

2) If manufactures were not a differentiated product sector, we know from the chapter 4 what the trade pattern would look like.

Home will export manufactures and import food, which showed by Figure 6-7, the length of the arrows indicates the value of trade in each direction.

71

Figure 6-6: Trade in a World Without Increasing Returns(without economies of scale)

Home (capital abundant)

Foreign (labor abundant)

Manufactures Food

72

3) If manufactures is a monopolistically competitive sector, each firm’s products are differentiated from other firms’

Home will still be a net exporter of manufactures and an importer of food.

73

Home will import and export within the manufacturing industry.

Because Foreign firms in the manufactures sector will produce products different from those that Home firms produce.

74

The world trade in a monopolistic competition model consist of two parts, intraindustry trade and interindustry trade showed by Figure 6-7.

Intraindustry trade-------------the exchange of manufactures for manufactures.

Interindustry trade-------------the exchange of manufactures for food.

75

Figure 6-7: Trade with Increasing Returns and Monopolistic Competition

Home (capital abundant)

Foreign (labor abundant)

Manufactures Food

Interindustrytrade

Intraindustrytrade

76

Differences between interindustry and intraindustry trade:

Interindustry trade reflects comparative advantage;

Intraindustry trade reflects monopolistic Competition and economies of Scale.

77

The pattern of intraindustry trade itself is unpredictable(by history and accident factors)

The relative importance of intraindustry and interindustry trade depends on how similar countries are.

78

4) The Significance of Intraindustry Trade

About one-fourth of world trade consists of intra-industry trade.

Intra-industry trade plays a particularly large role in the trade in manufactured goods among advanced industrial nations;

It accounts for most of world trade.

79

Table 6-3: Indexes of Intraindustry Trade for U.S. Industries, 1993

Intraindustry trade/Total trade--P139

80

5) Why Intraindustry Trade Matters

Intraindustry trade allows countries to benefit from larger markets (over and above those from comparative advantage).

Gains from intraindustry trade will be large when economies of scale are strong and products are highly differentiated.

The case study: Intraindustry trade in action

The north American auto pact of 1964

81

Case study

The intraindustry trade in China.

82

中国工业产品的产业内贸易较为发达， 1992--2001 年的产业内贸易指数平均在 0.9 以上。

如“机电产品制造业”、“车辆等运输设备制造业”的产业内贸易指数在 1992 年分别为 0.641 与0.527 ，到 2001 年分别升至 0.936 与 0.967 。

与此相反的是，“矿产品业”的产业内贸易指数稳步下降，说明中国已经从出口矿物原料产品转向了进口。

83

Topics of presentation

1. Comparative advantage;

2. Cost advantage;

3. The Gains from Trade;

4. The PPF and production point in the Specific Factors Model;

5. Income Distribution;

6. Heckscher-Ohlin Theorem;

7. Factor-Price Equalization Theorem;

84

8. Leontief paradox;

9. Term of trade;

10.Immiserizing growth;

11.The Economics of Dumping;

12.Learning curve.