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- Today we're going to wrap up our[br]discussion of entry, exit and supply

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curves by talking briefly about the[br]fascinating case of the decreasing cost

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

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we think that they explain clusters. So if[br]you look around the world, you'll see

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places like Dalton, Georgia, known as the[br]Carpet Capital of the world, because about

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90% of the world's manufactured carpet is[br]made in this one small town in Georgia. Or

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think about Silicon Valley for computer[br]technology or Hollywood for movies, or how

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about Hangji, China where they make three[br]to four billion toothbrushes a year in

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this one small town. Now what is it about[br]Hangji, China? Is there something special

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which makes this town just the ideal place[br]in all the world to make toothbrushes? No,

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not at all. It's not like mining diamonds[br]or gold. Toothbrushes could be made

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anywhere. Is there anything really special[br]about Dalton, Georgia which makes it the

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ideal place for making carpets? No, so why[br]then do we see these industrial clusters?

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The idea is this. Clusters evolve when[br]greater output decreases local industry

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costs, and the best way to explain this is[br]to give kind of a stylized history which

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fits the facts for many of these clusters[br]such as the one in Dalton, Georgia. The

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idea is that the first firm locates more[br]or less randomly, however the first firm

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creates some local knowledge. In the case[br]of Dalton, Georgia, it was knowledge about

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how to produce carpets. It began to train[br]workers in specialized techniques in order

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to produce carpets. Some input suppliers[br]for the backing of the carpet, for example,

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also began to locate in Dalton Georgia. So[br]there were advantages which began to

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

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looking around the country and deciding[br]where to locate then chooses to locate in

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Dalton, Georgia next to the first firm,[br]because that's where the specialized

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inputs already exist. That's where there's[br]some workers, which already understand the

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technology, can be more easily found. Once[br]the second firm does that, it contributes

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to the local knowledge. And the third firm[br]looking around also now finds that costs

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

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continues. You can think about this as a[br]virtuous circle. Output increases with the

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first firm. That produces some decreases[br]in cost, cost fall. That increases entry

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as other firms come into that area to take[br]advantage of those lower costs. And that

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increases output and the process[br]continues. Of course the process doesn't

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continue forever. We don't find cost going[br]to zero, but the process can continue long

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enough so that Dalton, Georgia gets an[br]overwhelming advantage. So many firms

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locate in Dalton, Georgia producing[br]carpets that it would be crazy to produce

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carpets anywhere else, because Dalton,[br]Georgia is where you can easily find the

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workers, where you can easily find the[br]knowledge, where the suppliers understand

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

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needed in order to produce carpet. So[br]these virtuous circles can generate

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

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it briefly for today.[br]If you do want to learn more, I've

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provided a bonus lecture which is from[br]MRUniversity on international trade,

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particularly on trade and external[br]economies of scale. I talk much more about

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these clusters and their influence on[br]trade in that video, which you'll also

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find in your course materials. Okay, let's[br]sum up. So in this chapter, we've really

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

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we've shown how a firm decides how much to[br]produce and also when to enter or exit

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an industry. Second, based upon those[br]production decisions, we've shown how a

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supply curve is built up founded upon the[br]choices of firms in entering and exiting

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and how much to produce. And we've looked[br]at three particular cases, the constant

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cost industry with examples of domain name[br]registration of spoons or waiters, or

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rutabagas has a flat supply curve. Costs[br]don't change as output of the industry

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changes and so the supply curve is flat.[br]The increasing cost industry - oil, steel,

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nuclear physicists, costs increase, industry[br]cost increases, output increases, and as a

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result, the supply curve increases. And[br]finally the uncommon but important case of

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a decreasing cost industry where at least[br]over some range and in a particular

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location cost can fall with increased[br]quantity, and how this type of cost

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

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and Hollywood, and so forth. Okay, that's[br]it. Thank you.

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- [Announcer] If you want to test yourself, [br]click, "Practice Questions," or if you're

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