ECON 101 Lecture 10: Lecture 10 - Intra-industry Trade
Document Summary
The intra-industry trade model: the intra-industry trade model focuses on trade in varieties of the same good and takes a partial equilibrium perspective, the intra-industry trade model rests on two key relationships. 1) price-variety (profit maximization past entry, pp schedule) 2) average-cost-variety (free entry until profits zero, cc schedule: once in the market, firms maximize their profits. However, free entry erodes their profits to zero in equilibrium: basic ingredients (assumptions) Number of factors of production: any, giving rise to a cost function. Mobility of factors of production: in the background. Number of industries (goods): 2 (manufactures and food) Key force: internal increasing returns to scale. Demand for each variety: (cid:1843)= [1 (cid:1854) (cid:4666)(cid:1842) (cid:1842) (cid:4667)] this is some function (cid:1843)(cid:4666)(cid:1842)(cid:4667) This is still a linear function: the only thing that a firm can choose is pi, so: demand qi for an individual firm i"s variety depends on total sales in the market.
