ECON CH. 7 Q'S

Internal economies of scale occur when the average costs

fall as the representative firm grows larger.

If output more than doubles when all inputs are​ doubled, production is governed by

increasing returns to scale.

What is a localized industrial​ cluster? A localized industrial cluster is a concentration of

many interconnected firms in one geographic area that provides a market large enough to support a wide range of specialized suppliers.

Internal economies of scale

may be associated with an imperfectly competitive industry.

British economist Alfred Marshall argued that there are three main​ reasons, which are still valid​ today, as to why a cluster of firms may be more efficient than an individual firm in isolation. What are those three​ reasons? The three reasons why a cluster of firms may be more efficient than an individual firm in isolation​ are:

the ability of a cluster to support specialized​ suppliers; the way that a geographically concentrated industry allows labor market​ pooling; and the way that a geographically concentrated industry helps foster knowledge spillovers.

Where there are economies of​ scale, the scale of production possible in a country is constrained by

the combined size of the domestic and foreign market.

Why do internal economies of scale lead to imperfectly competitive​ industries?

Large firms have cost advantages over small firms.

External economies of scale

are more likely to be associated with a perfectly competitive industry.

A growing movement among economists to model phenomena such as interregional and international trade as well as the rise of cities as different aspects of the same phenomenon--economic interaction across space--is referred to as

economic geography.

It is argued that a localized industrial cluster of firms can enjoy external economies by creating a pooled market for workers with highly specialized skills. In what ways can such a pooled labor market be advantageous and who could​ benefit? Labor market pooling can

reduce the likelihood of labor shortages for producers and unemployment for workers.

It is fairly common for an industrial cluster to break up and for production to move to locations with lower wages when the technology of the industry is no longer rapidly improving--when it is no longer essential to have the absolutely most modern​ machinery, when the need for highly skilled workers has​ declined, and when being at the cutting edge of innovation conveys only a small advantage. Explain this tendency of industrial clusters to break up in terms of the theory of external economies. As technological change and innovation slows in an​ industry,

specialized​ suppliers, labor market​ pooling, and knowledge​ spillovers, which are the reasons clusters are more efficient than individual​ firms, become less​ important; thus, firms will seek out low cost production locations and the cluster will breakdown.

International trade based on scale economies is likely to be associated with

A. Ricardian comparative advantage. B. the law of diminishing returns. C. absolute advantages due to resource abundance. D. comparative advantages associated with​ Heckscher-Ohlin factor-proportions. **E. None of the above.**

What factor primarily explains how a particular region develops the external economies that support an​ industry?

Accidents of history.

Which of the following is the most important determinant of the location of tradable industries within a​ country?

External economies.

How do economies of scale give rise to international​ trade?

International trade occurs because it increases the market size.

Evaluate the relative importance of economies of scale and comparative advantage in causing the following. ​ Specifically, for each​ outcome, state whether it was primarily the result of comparative advantage or economies of scale. Most of the​ world's aluminum is smelted in Norway or Canada. Half of the​ world's large jet aircraft are assembled in Seattle. Most semiconductors are manufactured in either the United States or Japan. Most Scotch whiskey comes from Scotland. Much of the​ world's best wine comes from France.

Most of the​ world's aluminum is smelted in Norway or Canada. --> Economies of scale Half of the​ world's large jet aircraft are assembled in Seattle. --> Economies of scale Most semiconductors are manufactured in either the United States or Japan. --> Economies of scale Most Scotch whiskey comes from Scotland. --> Comparative advantage Much of the​ world's best wine comes from France. --> Comparative advantage

In​ today's economy, knowledge is at least as important an input as are factors of production like​ labor, capital, and raw materials. This is especially true in highly innovative​ industries, where being even a few months behind the cutting edge in production techniques or product design can put a company at a major disadvantage. Do localized industrial clusters have an advantage over individual firms in obtaining specialized​ knowledge? Why?

Yes, localized industrial clusters do have an advantage in obtaining specialized​ knowledge, because they help foster knowledge spillovers--the informal exchange of information and ideas that takes place at a personal level and seems most effective when employees of different companies in a fairly small area mix socially and talk freely about technical issues.

What advantages can a localized industrial cluster​ provide? By bringing many firms together in one geographic​ location, a localized industrial cluster provides a market large enough to support

a network of suppliers that can specialize in what they do​ best, contract out other aspects of their​ businesses, and offer cheaper and more easily accessible products to other firms in the same area.

External economies of scale occur when average costs

fall as the industry grows larger but rise as the representative firm grows larger.

What type of knowledge spillover takes place more effectively in localized industrial​ clusters? The knowledge spillover that takes place more effectively in localized industrial clusters is

the informal exchange of information and ideas at a personal level when employees of different companies in those clusters mix socially and talk freely about technical issues.

Research has documented that it is common in Silicon Valley both for companies to expand rapidly and for workers to switch employers. To what type of external economy does this finding refer and​ why? The finding that companies often expand rapidly and workers often switch employers in Silicon Valley refers to

the way in which localized industrial clusters allow for labor market pooling--the increased likelihood that firms will be able to hire as many workers as they want to take advantage of business​ opportunities, and that workers will have a lower risk of unemployment.