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Copyright©2012PearsonEducation.Allrightsreserved.Chapter8FirmsintheGlobalEconomy:ExportDecisions,Outsourcing,andMultinationalEnterprisesCopyright©2012PearsonEducation.Allrightsreserved.8-2Preview•Monopolisticcompetitionandtrade•Thesignificanceofintra-industrytrade•Firmresponsestotrade:winners,losers,andindustryperformance•Dumping•MultinationalsandoutsourcingCopyright©2012PearsonEducation.Allrightsreserved.8-3Introduction•Wheneconomiesofscaleexist,largefirmsmaybemoreefficientthansmallfirms,andtheindustrymayconsistofamonopolyorafewlargefirms.–Productionmaybeimperfectlycompetitiveinthesensethatexcessormonopolyprofitsarecapturedbylargefirms.•Internaleconomiesofscaleresultwhenlargefirmshaveacostadvantageoversmallfirms,causingtheindustrytobecomeuncompetitive.Copyright©2012PearsonEducation.Allrightsreserved.8-4Introduction(cont.)•Internaleconomiesofscaleimplythatafirm’saveragecostofproductiondecreasesthemoreoutputitproduces.•Perfectcompetitionthatdrivesthepriceofagooddowntomarginalcostwouldimplylossesforthosefirmsbecausetheywouldnotbeabletorecoverthehighercostsincurredfromproducingtheinitialunitsofoutput.•Asaresult,perfectcompetitionwouldforcethosefirmsoutofthemarket.Copyright©2012PearsonEducation.Allrightsreserved.8-5Introduction(cont.)•Inmostsectors,goodsaredifferentiatedfromeachotherandthereareotherdifferencesacrossfirms.•Integrationcausesthebetter-performingfirmstothriveandexpand,whiletheworse-performingfirmscontract.•Additionalsourceofgainfromtrade:Asproductionisconcentratedtowardbetter-performingfirms,theoverallefficiencyoftheindustryimproves.•Studywhythosebetter-performingfirmshaveagreaterincentivetoengageintheglobaleconomy.Copyright©2012PearsonEducation.Allrightsreserved.8-6TheTheoryofImperfectCompetition•Inimperfectcompetition,firmsareawarethattheycaninfluencethepricesoftheirproductsandthattheycansellmoreonlybyreducingtheirprice.•Thissituationoccurswhenthereareonlyafewmajorproducersofaparticulargoodorwheneachfirmproducesagoodthatisdifferentiatedfromthatofrivalfirms.•Eachfirmviewsitselfasapricesetter,choosingthepriceofitsproduct.Copyright©2012PearsonEducation.Allrightsreserved.8-7Monopoly:ABriefReview•Amonopolyisanindustrywithonlyonefirm.•Anoligopolyisanindustrywithonlyafewfirms.•Intheseindustries,themarginalrevenuegeneratedfromsellingmoreproductsislessthantheuniformpricechargedforeachproduct.–Tosellmore,afirmmustlowerthepriceofallunits,notjusttheadditionalones.–Themarginalrevenuefunctionthereforeliesbelowthedemandfunction(whichdeterminesthepricethatcustomersarewillingtopay).Copyright©2012PearsonEducation.Allrightsreserved.8-8Monopoly:ABriefReview•AssumethatthedemandcurvethefirmfacesisastraightlineQ=A–B(P),whereQisthenumberofunitsthefirmsells,Pthepriceperunit,andAandBareconstants.•MarginalrevenueequalsMR=P–Q/B.•SupposethattotalcostsareC=F+c(Q),whereFisfixedcosts,thoseindependentofthelevelofoutput,andcistheconstantmarginalcost.Copyright©2012PearsonEducation.Allrightsreserved.8-9Fig.8-1:MonopolisticPricingandProductionDecisionsCopyright©2012PearsonEducation.Allrightsreserved.8-10Monopoly:ABriefReview(cont.)•Averagecostisthecostofproduction(C)dividedbythetotalquantityofproduction(Q).AC=C/Q=F/Q+c•Marginalcostisthecostofproducinganadditionalunitofoutput.•AlargerfirmismoreefficientbecauseaveragecostdecreasesasoutputQincreases:internaleconomiesofscale.Copyright©2012PearsonEducation.Allrightsreserved.8-11Fig.8-2:AverageVersusMarginalCostCopyright©2012PearsonEducation.Allrightsreserved.8-12Monopoly:ABriefReview(cont.)•Theprofit-maximizingoutputoccurswheremarginalrevenueequalsmarginalcost.–AttheintersectionoftheMCandMRcurves,therevenuegainedfromsellinganextraunitequalsthecostofproducingthatunit.•Themonopolistearnssomemonopolyprofits,asindicatedbytheshadedbox,whenPAC.Copyright©2012PearsonEducation.Allrightsreserved.8-13MonopolisticCompetition•Monopolisticcompetitionisasimplemodelofanimperfectlycompetitiveindustrythatassumesthateachfirm1.candifferentiateitsproductfromtheproductofcompetitors,and2.takesthepriceschargedbyitsrivalsasgiven.Copyright©2012PearsonEducation.Allrightsreserved.8-14MonopolisticCompetition(cont.)•Afirminamonopolisticallycompetitiveindustryisexpectedtosell–moreastotalsalesintheindustryincreaseandaspriceschargedbyrivalsincrease.–lessasthenumberoffirmsintheindustrydecreasesandasthefirm’spriceincreases.•Theseconceptsarerepresentedbythefunction:Copyright©2012PearsonEducation.Allrightsreserved.8-15MonopolisticCompetition(cont.)Q=S[1/n–b(P–P)]–Qisanindividualfirm’ssales–Sisthetotalsalesoftheindustry–nisthenumberoffirmsintheindustry–bisaconstanttermrepresentingtheresponsivenessofafirm’ssalestoitsprice–Pisthepricechargedbythefirmitself–PistheaveragepricechargedbyitscompetitorsCopyright©2012PearsonEducation.Allrightsreserved.8-16MonopolisticCompetition(cont.)•Assumethatfirmsaresymmetric:allfirmsfacethesamedemandfunctionandhavethesamecostfunction.–ThusallfirmsshouldchargethesamepriceandhaveequalshareofthemarketQ=S/n–Averagecostsshoulddependonthesizeofthemarketandthenumberoffirms:AC=C/Q=F/Q+c=nF/S+cCopyright