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study notes ch6-8

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Junchul Kim

Chapter 6: With increasing returnseconomies of scale (e.g. monopoly, oligopoly, where doubling the inputs to an industry will more than double the industrys production), markets usually become imperfectly competitivethus economies of scale provide an incentive for international trade. - to get the labour to expand its production of some goods, country A must decrease or abandon the production of others - these goods will then be produced in country B instead, using the labour formerly employed in the industries whose production has expanded in country A * international trade makes it possible for each country to produce a restricted range of goods and to take +ve of economies of scale without sacrificing variety in consumption; thus leads to an increase in the variety of goods available External Economies of Scale: - when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm - e.g. the efficiency of firms is increased by having a larger industry, even though each firm is the same size as before - many small firms, thus perfectly competitive Internal Economies of Scale: - when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry - e.g. when the costs of production fall, a firm is more efficient if its output is larger - cost +ve to large firms, thus imperfectly competitive Perfectly Competitive Market: a market in which there are many buyers and sellers, nobody represents a large part of the market, thus all firms are price takers Imperfect Competition: firms are aware that they can influence the price of their products, they can sell more only by reducing their price, thus each firm is a price setter Monopoly: Marginal RevenueMR is always less than the price, bc to sell an additional unit the firm must lower the price of all units, not just the marginal one: 1) depends on how much output the firm is already selling: a firm thats not selling very many units will not lose much by cutting the price it receives on those units 2) also the slope of demand curve: if flat, then monopolist can sell an additional unit with only a small price cut, MR will be close to the price per unit; if steep, selling an additional unit will require a large price cut, thus MR much less than price Linear Cost Function: C= F+ c* Q
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