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- [Alex] Today we're [br]going to wrap up

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our discussion [br]of entry, exit and supply curves

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by talking briefly [br]about the fascinating case

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of the decreasing cost industry.

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What's important and interesting [br]about decreasing cost industries is

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that we think [br]that they explain clusters.

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If you look around the world, you'll [br]see places like Dalton, Georgia,

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known as the "Carpet Capital [br]of the World,"

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because about 90% [br]of the world's manufactured carpet is

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made in this one [br]small town in Georgia.

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Or think about Silicon Valley [br]for computer technology

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or Hollywood for movies.

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Or how about Hangji, China [br]where they make three

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to four billion toothbrushes a year[br]in this one small town.

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Now what is it about Hangji, China?

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Is there something special[br]which makes this town

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just the ideal place in all [br]the world to make toothbrushes?

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No, not at all.

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It's not like mining [br]diamonds or gold.

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Toothbrushes can be [br]made anywhere.

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Is there anything really [br]special about Dalton, Georgia

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which makes it the ideal place [br]for making carpets?

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No, so why then do we see [br]these industrial clusters?

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The idea is this: clusters evolve [br]when greater output decreases

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local industry costs,[br]and the best way to explain this

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is to give kind [br]of a stylized history which

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fits the facts for many [br]of these clusters,

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such as the one in Dalton, Georgia.

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The idea is that the first firm locates [br]more or less randomly.

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However, the first firm creates [br]some local knowledge.

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In the case of Dalton, Georgia,

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it was knowledge[br]about how to produce carpets.

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It began to train workers [br]in specialized techniques

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in order to produce carpets.

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Some input suppliers[br]for the backing of the carpet,

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for example, also began [br]to locate in Dalton, Georgia.

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So there were advantages[br]which began to develop

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in Dalton, Georgia simply [br]because one firm was there already.

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A second firm looking [br]around the country

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and deciding where to locate [br]then chooses to locate

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in Dalton, Georgia [br]next to the first firm, because

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that's where the specialized [br]inputs already exist.

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That's where there's [br]some workers -- which already

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understand the technology -- [br]can be more easily found.

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Once the second firm does that,

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it contributes[br]to the local knowledge.

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And the third firm looking around [br]also now finds that costs are

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even lower in Dalton, Georgia [br]than they are elsewhere,

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and the process continues.

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You can think about this [br]as a virtuous circle.

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Output increases [br]with the first firm.

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That produces some decreases[br]in costs; costs fall.

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That increases entry [br]as other firms come into that area

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to take advantage [br]of those lower costs.

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And that increases output,[br]and the process continues.

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Of course, the process doesn't [br]continue forever.

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We don't find costs going to zero, [br]but the process can continue

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long enough so that Dalton, Georgia [br]gets an overwhelming advantage.

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So many firms locate[br]in Dalton, Georgia producing carpets

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that it would be crazy to produce [br]carpets anywhere else,

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because Dalton, Georgia is where [br]you can easily find the workers,

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where you can easily find [br]the knowledge,

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where the suppliers [br]understand the business.

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In Dalton, Georgia, [br]even the community colleges teach

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the techniques needed [br]in order to produce carpet.

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So these virtuous circles can [br]generate decreasing costs.

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Okay, I'm not going [br]to say anymore about that.

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I'm going to leave it [br]briefly for today.

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If you do want to learn more, [br]I've provided a bonus lecture,

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which is from MRUniversity,[br]on international trade,

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particularly on trade [br]and external economies of scale.

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I talk much more about [br]these clusters and their influence

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on trade in that video, [br]which you'll also find

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in your course materials.

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Okay, let's sum up.

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So in this chapter, [br]we've really done two things.

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First, based upon profit [br]maximization in a firm's cost curves,

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we've shown how a firm decides [br]how much to produce

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and also when to enter [br]or exit an industry.

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Second, based upon those[br]production decisions, we've shown

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how a supply curve is built up [br]founded upon the choices of firms

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in entering and exiting[br]and how much to produce.

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And we've looked[br]at three particular cases,

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the constant cost industry with [br]examples of domain name registration,

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or spoons, or waiters, or rutabagas [br]has a flat supply curve.

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Costs don't change as output [br]of the industry changes,

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and so the supply curve is flat.

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The increasing cost industry -- [br]oil, steel, nuclear physicists --

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costs increase -- industry[br]cost increases as output increases --

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and as a result, [br]the supply curve increases.

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And finally the uncommon [br]but important case of a decreasing

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cost industry where at least[br]over some range,

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and in a particular location, costs[br]can fall with increased quantity,

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and how this type of cost [br]structure generates clusters,

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clusters like Dalton, Georgia, [br]like Silicon Valley,

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and Hollywood, and so forth

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Okay, that's it. Thank you.

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- [Narrator] If you want to test [br]yourself, click, "Practice Questions."

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Or if you're ready to move on, [br]just click, "Next Video."

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