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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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