Intra-Industry Trade and Market Integration
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Questions and Answers

What is a significant advantage of an integrated market over national markets?

  • It supports more firms producing at a larger scale with lower prices. (correct)
  • It leads to higher prices for consumers.
  • It diminishes the variety of choices available to consumers.
  • It reduces the number of firms in the market.

    • Which statement best describes intra-industry trade?

  • It solely occurs in the agricultural sector.
  • It emphasizes the trade between countries with significant economic disparities.
  • It refers to two-way exchanges of similar goods. (correct)
  • It involves the exchange of goods with different comparative advantages.

    • What factor contributes to a smaller country gaining more from market integration than a larger country?

  • Smaller countries typically have better access to international markets.
  • Higher levels of technology and skilled labor in larger countries.
  • The potential for economies of scale is more significant for smaller economies. (correct)
  • Larger countries have less need for trade.

    • What percentage of world trade is estimated to be intra-industry trade?

    <p>About 25-50%</p> Signup and view all the answers

    Which industries in the U.S. are known to have the most intra-industry trade?

    <p>Pharmaceuticals, chemicals, and specialized machinery.</p> Signup and view all the answers

    What is a result of internal economies of scale for firms in an industry?

    <p>Cost advantages for larger firms</p> Signup and view all the answers

    What implication does perfect competition have for firms when production costs are high?

    <p>Firms must lower costs or exit the market</p> Signup and view all the answers

    How does integration affect firms in an industry?

    <p>Efficiencies arise as production consolidates in better-performing firms</p> Signup and view all the answers

    In an imperfect competition scenario, how do firms generally set prices?

    <p>Firms set prices based on their ability to influence market prices</p> Signup and view all the answers

    What is the main difference between a monopoly and an oligopoly?

    <p>A monopoly involves a single firm while an oligopoly involves several firms</p> Signup and view all the answers

    What occurs in an oligopolistic market when a firm wants to increase sales?

    <p>The firm can sell more by lowering the price of all units</p> Signup and view all the answers

    What challenge do firms face under perfect competition regarding production?

    <p>They struggle to cover production costs when prices equal marginal costs</p> Signup and view all the answers

    What defines the demand function in a monopoly?

    <p>It reflects the price consumers are willing to pay for each unit sold</p> Signup and view all the answers

    What is the relationship between marginal revenue and price in a monopoly?

    <p>Marginal revenue is always less than price.</p> Signup and view all the answers

    What determines the profit-maximizing output level for a monopolistic firm?

    <p>Where marginal cost equals marginal revenue.</p> Signup and view all the answers

    How is average cost calculated for a firm?

    <p>Total cost divided by output.</p> Signup and view all the answers

    Which of the following statements about average cost is true?

    <p>Average cost decreases as output increases.</p> Signup and view all the answers

    What effect does internal economies of scale have on a large firm's average cost?

    <p>It leads to a decrease in average cost as output increases.</p> Signup and view all the answers

    What is indicated by the shaded rectangle in a monopolistic pricing graph?

    <p>The monopoly's profits when price is greater than average cost.</p> Signup and view all the answers

    What does marginal cost represent in production?

    <p>The cost of producing one additional unit.</p> Signup and view all the answers

    What happens at the point where marginal revenue equals marginal cost for a monopolistic firm?

    <p>The firm maximizes its profits.</p> Signup and view all the answers

    What is the effect of a larger market on the average cost for firms?

    <p>Average costs decrease as firms can produce more.</p> Signup and view all the answers

    How many firms exist in the integrated market after combining Home and Foreign?

    <p>10 firms</p> Signup and view all the answers

    What is the average cost of an auto in the integrated market?

    <p>$8,000</p> Signup and view all the answers

    What is the price of an auto in the home market before trade?

    <p>$10,000</p> Signup and view all the answers

    How does the number of firms change from Home to the integrated market?

    <p>It increases from 6 to 10.</p> Signup and view all the answers

    What was the annual output per firm in the Foreign market before trade?

    <p>200,000 autos</p> Signup and view all the answers

    What happens to the price of autos as a result of market integration?

    <p>The price decreases.</p> Signup and view all the answers

    Which market had the highest price per auto before trade?

    <p>Home market</p> Signup and view all the answers

    What characteristic is unique to firms in a monopolistically competitive market?

    <p>They can differentiate their products from competitors.</p> Signup and view all the answers

    How does an increase in the number of firms affect sales of a specific firm in a monopolistically competitive industry?

    <p>Sales decrease for the specific firm.</p> Signup and view all the answers

    In the given function, what does the variable 'b' represent?

    <p>The responsiveness of a firm’s sales to its price.</p> Signup and view all the answers

    What happens to the average cost as total sales in the industry increase?

    <p>Average cost decreases for each firm.</p> Signup and view all the answers

    Which of the following inversely affects individual firm sales in monopolistic competition?

    <p>An increase in the firm's own price.</p> Signup and view all the answers

    If all firms in a monopolistically competitive market are symmetric, what can be expected regarding prices and market shares?

    <p>All firms will charge the same price.</p> Signup and view all the answers

    What is the effect of increasing the number of firms (n) on average cost (AC) for each firm?

    <p>Average cost increases for each firm.</p> Signup and view all the answers

    What does the variable 'P' signify in the sales function presented?

    <p>Price charged by the firm itself.</p> Signup and view all the answers

    Which industry had the highest performance score in 2009?

    <p>Metalworking Machinery</p> Signup and view all the answers

    What is the relationship between marginal cost and operating profits?

    <p>Operating profits decrease as marginal cost increases</p> Signup and view all the answers

    What prediction does the model of monopolistic competition and trade make regarding exporters?

    <p>Only larger firms with lower marginal costs tend to export</p> Signup and view all the answers

    Which firm is likely to be more profitable when both face the same demand curve?

    <p>Firm 1 with a lower marginal cost</p> Signup and view all the answers

    What generally happens to worse-performing firms in an industry with increased competition?

    <p>They are forced to exit the industry</p> Signup and view all the answers

    Which product category had the lowest performance score in 2009?

    <p>Footwear</p> Signup and view all the answers

    What is indicated by a firm having a marginal cost above c*?

    <p>The firm cannot operate profitably and should shut down</p> Signup and view all the answers

    Based on trade costs, what is a key reason why some firms do not export?

    <p>Excessive trade costs make exporting unprofitable</p> Signup and view all the answers

    Study Notes

    International Economics - Week 9a

    • Course: ECO2008
    • Topic: Firms in the Global Economy: Export and Foreign Sourcing Decisions and Multinational Enterprises
    • Week: 9a
    • Instructor: Brian Varian
    • University: Newcastle University

    Introduction

    • Internal economies of scale occur when large firms have a cost advantage over smaller firms. This can lead to industry consolidation and a decrease in competition.
    • Internal economies of scale are characterized by decreasing average production costs the more output a firm produces.

    Introduction (continued)

    • Perfect competition, where prices are driven down to marginal cost, can lead to losses for firms unable to recover costs. Consequently, firms may exit the market.
    • In most industries, products are differentiated from competitors, and other factors influence firm performance.

    Introduction (continued)

    • The integration of firms causes successful companies to grow, with weaker companies contracting or failing.
    • This concentration of production leads to an increase in industrial efficiency.
    • Better performing companies have greater incentive to participate in international trade.

    The Theory of Imperfect Competition

    • Imperfect competition means firms can influence the price of their products and increase demand by reducing prices.
    • Imperfect competition occurs when there are limited firms for a particular good, or firms provide differentiated products that distinguish themselves from rivals.
    • Firms in imperfect competition actively determine their product's price.

    Monopoly: A Brief Review

    • A monopoly is an industry with only one firm.
    • An oligopoly is an industry with only a few firms.
    • In monopolies and oligopolies, the marginal revenue from selling additional units is lower than the uniform price. In order to sell more, firms need to lower the price for all units, not just newly produced units.
    • Marginal revenue always lies below the demand curve—which represents the highest price consumers will be willing to pay.

    Monopoly: A Brief Review (continued)

    • Demand curves are often presented as linear (straight line).
    • Total costs can be represented as a function of fixed costs (independent of production quantity) plus a constant marginal cost (additional cost per unit of production).

    Monopoly: A Brief Review (continued)

    • Average Cost: represents total cost per unit of output. It is calculated as total cost divided by the total quantity produced.
    • Marginal Cost: represents the cost of producing one additional unit of output.
    • Larger firms typically display economies of scale; their average costs decrease as output increases.

    Monopoly: A Brief Review (continued)

    • A visual representation (Figure 8.2) demonstrates the relationship between average and marginal costs. Constant marginal costs are represented and average costs are shown to decrease as output quantity increases.

    Figure 8.1 Monopolistic Pricing and Production Decisions

    • A monopoly firm produces at a competitive output level where marginal revenue equals marginal cost (MR=MC).
    • The monopoly's profits are given by the shaded box, which shows the difference between the price and the average total cost multiplied by the amount produced.

    Monopoly: A Brief Review (continued)

    • Profit maximization occurs where marginal revenue equals marginal cost.
    • The monopolist benefits from the difference between price and average cost.

    Monopolistic Competition

    • Monopolistic competition is a model of imperfectly competitive markets where firms differentiate their products.
    • Firms take the prices charged by their competitors as given.

    Monopolistic Competition (continued)

    • Firm sales are affected by industry-wide sales and competitor pricing. Sales decrease as industry sales and competitor prices increase.
    • Firm sales also depend on its own price, with sales decreasing as the firm's price increases.

    Monopolistic Competition (continued)

    • A formula (Q = S / n - b (P-P̄)) summarizes firm sales, market size, number of competitors, and price response to prices. (S is total industry sales, n is the number of firms, b is a constant representing the responsiveness of a firm's sales to its price, P is the price charged by the firm, and P̄ is the average price of competitors)
    • Average costs depend on market size and the number of firms (AC = F/S +c).

    Monopolistic Competition (continued)

    • As the number of firms increases, average cost increases because firms produce less.
    • An increase in industry sales leads to a decrease in average cost since firms can produce more.

    Figure 8.3 Equilibrium in a Monopolistically Competitive Market

    • Equilibrium in a monopolistic competitive market occurs where price equals average cost. If firms are charging above average cost, new firms enter the market. If firms are charging less than average cost, firms exit the market.

    Monopolistic Competition (continued)

    • Equilibrium occurs when price equals average cost.
    • If prices are higher than average cost, new firms enter the market which lowers prices.
    • If prices are lower than average cost, firms exit the market, which increases prices.

    Monopolistic Competition (continued)

    • The number of firms and corresponding prices are primarily determined by two factors:
      1. More firms lead to intense competition, meaning lower industry prices.
      2. More firms lead to less output per firm, which increases average cost.

    Monopolistic Competition and Trade

    • Increased market size (by international trade) decreases average costs in monopolistic competition.
    • Increased international trade expands consumer choices and causes costs to fall.

    Monopolistic Competition and Trade (continued)

    • Trade between nations with similar products and no comparative advantage differences, driven by product differentiation and economies of scale, is a distinct type of international trade.

    Figure 8.4 Effects of a Larger Market

    • A larger market allows firms to produce more, thus lowering costs.
    • Market expansion results in more firms and reduced prices.

    Gains from an Integrated Market: A Numerical Example

    • This example analyzes the combined market of Home and Foreign countries.
    • Home’s annual sales are 900,000, and Foreign’s are 1.6 million automobiles.

    Figure 8.5 Equilibrium in the Automobile Market

    • Graphs detail market equilibrium for Home, Foreign, and the combined market.
    • The intersection of the PP and CC curves determines equilibrium output, the number of firms, and the industry price.

    Table 8.1 Hypothetical Example of Gains from Market Integration

    • A table showcasing the integration of the Home and Foreign markets. It displays data such as industry outputs, firm numbers, output per firm, average cost, and price for both before and after market integration. The combined market is larger, supporting more firms and a lower industry price.

    Gains from an Integrated Market: A Numerical Example (continued)

    • Integration leads to more firms, each producing more at a lower price, benefitting consumers by increasing choice and driving down costs.
    • Increased market size improves industry performance.

    Firm Responses to Trade

    • Increased competition results in lower performance (worse performing firms leave) for certain firms.
    • The most successful firms expand due to improved output opportunities.
    • Overall industry performance increases as firms adapt to competition.

    Figure 8.6 Performance Differences Across Firms

    • Graphs compare firm performance (in relation to marginal cost and demand).
    • Firms with lower marginal costs set lower prices and have higher profits.
    • Firms with higher marginal costs may cease operations due to losses.

    Trade Costs and Export Decisions

    • Trade costs predict a subset of exporters, with lower marginal costs and successful firms.

    Figure 8.8 Export Decisions with Trade Costs

    • Firms with lower marginal costs are more likely to export because they can absorb the additional costs.
    • Firms with higher marginal costs may not find it worthwhile to enter the export market.

    Summary

    • Economies of scale cause average costs to decline as production increases.
    • Monopolistic competition allows firms to charge higher prices based on differentiated products, but they must still compete with others.
    • Increased trade leads to lower costs and prices for consumers.
    • Intra-industry trade is predicted by monopolistic competition, with it having no effect on income distribution.

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    Related Documents

    ECO2008 International Economics Week 9a PDF

    Description

    This quiz explores the concepts of integrated markets versus national markets, detailing the nuances of intra-industry trade. It also discusses factors influencing trade benefits for smaller countries and highlights key U.S. industries engaged in intra-industry trade. Test your understanding of these crucial economic principles!

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