EC 340 Lecture Notes - Lecture 3: Monopolistic Competition, Exim, Profit Margin
Document Summary
Intraindustry: profit-maximizing price charged, and cost of production does not depend on market size, both countries will export and import the good, larger market supports larger firms and more firms, average cost and price both fall. Internal economies to scale: the prices of export goods fall with intraindustry trade but not with comparative advantage- based trade. Intraindustry trade is usually perceived as less threatening to jobs and firms than comparative advantage-based trade. Intraindustry trade generally gives consumers more choices: grubel - lloyd index: used to measure the importance of intraindustry trade, 1-[(|ex-im|)/(ex+im)] Monopolistic competition and international trade: four industrial structures, perfect competition - many price taking firms; produce identical products. If firm increases price, it will lose all customers to lower price competitor: monopolistic - many price-setting firms. If quantity is too low, economic profit would be positive and output would increase.
