ECON 2610 Study Guide - Midterm Guide: World Trade Organization, Oligopoly, Import License

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Sector Specific Factors Model (Graph 1)
K is not mobile within the nation
o Specific to particular industry
L is mobile
o L will move around until wages are equal
o )f you want to produce more of something, you can’t hire more capital,
but you can increase wages in order to produce more (raise L)
VMP (value of marginal product) = wages
o If you want to make $10, you must generate $10 for firm
If good X is more valuable than Y
o Good X will take Good Y’s labor, b/c more valuable in X
Y industry now has to pay higher wages to keep labor (not wanted)
Labor Purchasing Power
The more intensively capital is used, the value of the capital goes up
Pepsi center used a lot, worth more
PKx rises relative to everything (wage, labor, etc.)
PKy falls relative to everything
Economies of Scale
Def: As the scale of production increases, more of all inputs are used, and avg.
cost of production falls
With trade, a country can take advantage of econ. Of scale and produce more
efficiently than by itself
External
o To all firms
o Typically small firms and perf. Competition
Internal
o Specific to firm
o Typically large firms having cost advantage over small firms, causing
imperf. Competition
Internal (Graph 2 and 3)
Assume constant returns to scale (min ATC)
o Min cost won’t lower
o Curves shift out as K is increased
Disallow constant returns to scale (ATC can drop)
o More efficient level of production
External
Outside a firm, but within an industry
Occur when cost per unit of output depends on the size of the industry.
If large industry, may locate near in order to produce cheaper
o Silicon Valley semiconductor parts all close
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All benefit within industry, due to
o Better transportation network
o R & D facilities local
o Local component suppliers
o Same businesses in same location
Overall, it’s better for the world that each industry with external economies be
concentrated somewhere.
Conclusions
o With increasing returns, trade leads to lower prices in both countries
o Without, it raises home prices and lowers foreign prices
If home is cheap and foreign expensive
Internal
Occur when the cost per unit of output depends on the size of a firm.
Short Run
o K fixed
o Fixed cost (capital, variable, and labor)
Long run
o All inputs variable
o If constant returns to scale, ATC has a minimum
o If increasing returns to scale, ATC declines as output and production
increase
Doesn’t matter which country produces which good
Characteristics of markets
# of firms in industry
Type of product
o 2 classifications
Homogeneous identical (just perceived as identical)
Coke vs. Pepsi
Differentiated is a perceived difference (varieties in product)
Existence of barriers to entry by potentially new firms
o If large #, difficult for firms to come in
Legal barriers gov’t provides licenses
Economic barriers (start up costs license to sell peanuts etc.)
Geographical barriers only one town nearby, that’s why only 1
firm)
Existence of non-price competition
o Marketing
Color of product, who sold to, age distribution, etc.
o Advertising
Ability of a firm to influence market price
Market types
o Perfect competition
Many firms
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So many that each firm is small compared to whole market
Product produced is homogeneous
No barriers (because many firms nothing to keep them out)
No non-price competition (advertising)
Constant returns to scale
No advantage to firm of expanding output
Cant reduce cost below the minimum
o Monopolistic competition
Many firms
No barriers
Differentiated goods (varieties of products)
Costs can fall a tiny bit
Can act like a mini monopoly
Non-price competition (always advertising)
No ability to set price
o Oligopoly
Few firms (dominant)
Product can be anything
Lots of advertising
Super Bowl, sporting events, etc.
National ads, because national brands
o Duopoly
2 firms
o Monopoly
1 firm dominates
Probably a lot of barriers
Will advertise, still need to convince public to buy the product
Cause of CA
Can be a lot some from each model
This model adds profit
Monopolistic Competition/Oligopoly
Always trying to change the product to differentiate from your competitor
o Color change even works
Monopolistic competition
Each firm behaves as if it were monopolistic
More sales the lower the price is from your competitor
Trade Policy
Conducted on 2 levels
1. Multilateral Negotiations
a. Labor, enviro, services, customs, trade capacity (through WTO)
b. All nations treated equally
WTO
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