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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,

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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.

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

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I'm going to leave it 
briefly for today.

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

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which is from MRUniversity
on international trade,

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particularly on trade 
and external economies of scale.

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I talk much more about 
these clusters and their influence

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on trade in that video, 
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, 
we've really done two things.

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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

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and also when to enter 
or exit an industry.

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Second, based upon those
production decisions, we've shown

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

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in entering and exiting
and how much to produce.

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And we've looked
at three particular cases,

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the constant cost industry with 
examples of domain name registration

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or spoons, or waiters, or rutabagas 
has a flat supply curve.

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

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and so the supply curve is flat.

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The increasing cost industry -- 
oil, steel, nuclear physicists,

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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, 
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♪[music]♪