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

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our discussion 
of entry, exit and supply curves

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by talking briefly 
about the fascinating case

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of the decreasing cost industry.

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What's important and interesting 
about decreasing cost industries is

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that we think 
that they explain clusters.

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places like Dalton, Georgia,

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known as the Carpet Capital 
of the world,

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

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made in this one 
small town in Georgia.

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Or think about Silicon Valley 
for computer technology

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or Hollywood for movies.

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Or how about Hangji, China 
where they make three

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

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Now what is it about Hangji, China?

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Is there something special
which makes this town

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just the ideal place in all 
the world to make toothbrushes?

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No, not at all.

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It's not like mining 
diamonds or gold.

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Toothbrushes could be 
made anywhere.

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Is there anything really 
special about Dalton, Georgia,

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which makes it the ideal place 
for making carpets?

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

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The idea is this: clusters evolve 
when greater output decreases

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local industry costs,
and the best way to explain this

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is to give kind 
of a stylized history which

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fits the facts for many 
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 
more or less randomly.

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However, the first firm creates 
some local knowledge.

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In the case of Dalton, Georgia,

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it was knowledge
about how to produce carpets.

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It began to train workers 
in specialized techniques

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in order to produce carpets.

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Some input suppliers
for the backing of the carpet,

NOTE Paragraph

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for example, also began 
to locate in Dalton Georgia.

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So there were advantages
which began to develop

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

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A second firm looking 
around the country

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and deciding where to locate 
then chooses to locate

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in Dalton, Georgia 
next to the first firm, because

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that's where the specialized 
inputs already exist.

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That's where there's 
some workers -- which already

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understand the technology -- 
can be more easily found.

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Once the second firm does that,

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it contributes
to the local knowledge.

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

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even lower in Dalton, Georgia 
than they are elsewhere,

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and the process continues.

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You can think about this 
as a virtuous circle.

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Output increases 
with the first firm.

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That produces some decreases
in costs; costs fall.

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That increases entry 
as other firms come into that area

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to take advantage 
of those lower costs.

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And that increases output,
and the process continues.

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Of course, the process doesn't 
continue forever.

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We don't find cost going to zero, 
but the process can continue

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

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So many firms locate
in Dalton, Georgia producing carpets

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that it would be crazy to produce 
carpets anywhere else,

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

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where you can easily find 
the knowledge,

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where the suppliers 
understand the business.

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In Dalton, Georgia, 
even the community colleges teach

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the techniques needed 
in order to produce carpet.

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So these virtuous circles can 
generate decreasing costs. Okay, I'm not going to
say anymore about that. I'm going to leave

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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structure generates clusters, clusters
like Dalton, Georgia, like Silicon Valley

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

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

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ready to move on, just
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♪[music]♪