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- Today we're going to wrap up our
discussion of entry, exit and supply
curves by talking briefly about the
fascinating case of the decreasing cost
industry. What's important and interesting
about decreasing cost industries is that
we think that they explain clusters. So if
you look around the world, you'll see
places like Dalton, Georgia, known as the
Carpet Capital of the world, because about
90% of the world's manufactured carpet is
made in this one small town in Georgia. Or
think about Silicon Valley for computer
technology or Hollywood for movies, or how
about Hangji, China where they make three
to four billion toothbrushes a year in
this one small town. Now what is it about
Hangji, China? Is there something special
which makes this town just the ideal place
in all the world to make toothbrushes? No,
not at all. It's not like mining diamonds
or gold. Toothbrushes could be made
anywhere. Is there anything really special
about Dalton, Georgia which makes it the
ideal place for making carpets? No, so why
then do we see these industrial clusters?
The idea is this. Clusters evolve when
greater output decreases local industry
costs, and the best way to explain this is
to give kind of a stylized history which
fits the facts for many of these clusters
such as the one in Dalton, Georgia. The
idea is that the first firm locates more
or less randomly, however the first firm
creates some local knowledge. In the case
of Dalton, Georgia, it was knowledge about
how to produce carpets. It began to train
workers in specialized techniques in order
to produce carpets. Some input suppliers
for the backing of the carpet, for example,
also began to locate in Dalton Georgia. So
there were advantages which began to
develop in Dalton, Georgia simply because
one firm was there already. A second firm
looking around the country and deciding
where to locate then chooses to locate in
Dalton, Georgia next to the first firm,
because that's where the specialized
inputs already exist. That's where there's
some workers, which already understand the
technology, can be more easily found. Once
the second firm does that, it contributes
to the local knowledge. And the third firm
looking around also now finds that costs
are even lower in Dalton, Georgia than
they are elsewhere and the process
continues. You can think about this as a
virtuous circle. Output increases with the
first firm. That produces some decreases
in cost, cost fall. That increases entry
as other firms come into that area to take
advantage of those lower costs. And that
increases output and the process
continues. Of course the process doesn't
continue forever. We don't find cost going
to zero, but the process can continue long
enough so that Dalton, Georgia gets an
overwhelming advantage. So many firms
locate in Dalton, Georgia producing
carpets that it would be crazy to produce
carpets anywhere else, because Dalton,
Georgia is where you can easily find the
workers, where you can easily find the
knowledge, where the suppliers understand
the business. In Dalton, Georgia, even the
community colleges teach the techniques
needed in order to produce carpet. So
these virtuous circles can generate
decreasing costs. Okay, I'm not going to
say anymore about that. I'm going to leave
it briefly for today.
If you do want to learn more, I've
provided a bonus lecture which is from
MRUniversity on international trade,
particularly on trade and external
economies of scale. I talk much more about
these clusters and their influence on
trade in that video, which you'll also
find in your course materials. Okay, let's
sum up. So in this chapter, we've really
done two things. First, based upon profit
maximization in a firm's cost curves,
we've shown how a firm decides how much to
produce and also when to enter or exit
an industry. Second, based upon those
production decisions, we've shown how a
supply curve is built up founded upon the
choices of firms in entering and exiting
and how much to produce. And we've looked
at three particular cases, the constant
cost industry with examples of domain name
registration of spoons or waiters, or
rutabagas has a flat supply curve. Costs
don't change as output of the industry
changes and so the supply curve is flat.
The increasing cost industry - oil, steel,
nuclear physicists, costs increase, industry
cost increases, output increases, and as a
result, the supply curve increases. And
finally the uncommon but important case of
a decreasing cost industry where at least
over some range and in a particular
location cost can fall with increased
quantity, and how this type of cost
structure generates clusters, clusters
like Dalton, Georgia, like Silicon Valley
and Hollywood, and so forth. Okay, that's
it. Thank you.
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