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- [Alex] 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.

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 costs; costs 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

or 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.

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

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