Entry, Exit, and Supply Curves: Decreasing Costs
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0:01 - 0:06♪[music]♪
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0:09 - 0:13- Today we're going to wrap up our
discussion of entry, exit and supply -
0:13 - 0:18curves by talking briefly about the
fascinating case of the decreasing cost -
0:18 - 0:28industry. What's important and interesting
about decreasing cost industries is that -
0:29 - 0:33we think that they explain clusters. So if
you look around the world, you'll see -
0:33 - 0:38places like Dalton, Georgia, known as the
Carpet Capital of the world, because about -
0:38 - 0:4590% of the world's manufactured carpet is
made in this one small town in Georgia. Or -
0:45 - 0:50think about Silicon Valley for computer
technology or Hollywood for movies, or how -
0:50 - 0:56about Hangji, China where they make three
to four billion toothbrushes a year in -
0:56 - 1:02this one small town. Now what is it about
Hangji, China? Is there something special -
1:02 - 1:09which makes this town just the ideal place
in all the world to make toothbrushes? No, -
1:09 - 1:14not at all. It's not like mining diamonds
or gold. Toothbrushes could be made -
1:14 - 1:18anywhere. Is there anything really special
about Dalton, Georgia which makes it the -
1:18 - 1:26ideal place for making carpets? No, so why
then do we see these industrial clusters? -
1:26 - 1:33The idea is this. Clusters evolve when
greater output decreases local industry -
1:33 - 1:38costs, and the best way to explain this is
to give kind of a stylized history which -
1:39 - 1:44fits the facts for many of these clusters
such as the one in Dalton, Georgia. The -
1:44 - 1:50idea is that the first firm locates more
or less randomly, however the first firm -
1:50 - 1:55creates some local knowledge. In the case
of Dalton, Georgia, it was knowledge about -
1:55 - 2:00how to produce carpets. It began to train
workers in specialized techniques in order -
2:01 - 2:06to produce carpets. Some input suppliers
for the backing of the carpet, for example, -
2:06 - 2:12also began to locate in Dalton Georgia. So
there were advantages which began to -
2:12 - 2:20develop in Dalton, Georgia simply because
one firm was there already. A second firm -
2:20 - 2:26looking around the country and deciding
where to locate then chooses to locate in -
2:26 - 2:31Dalton, Georgia next to the first firm,
because that's where the specialized -
2:31 - 2:36inputs already exist. That's where there's
some workers, which already understand the -
2:36 - 2:42technology, can be more easily found. Once
the second firm does that, it contributes -
2:43 - 2:50to the local knowledge. And the third firm
looking around also now finds that costs -
2:50 - 2:54are even lower in Dalton, Georgia than
they are elsewhere and the process -
2:54 - 2:59continues. You can think about this as a
virtuous circle. Output increases with the -
3:00 - 3:06first firm. That produces some decreases
in cost, cost fall. That increases entry -
3:06 - 3:12as other firms come into that area to take
advantage of those lower costs. And that -
3:12 - 3:17increases output and the process
continues. Of course the process doesn't -
3:17 - 3:22continue forever. We don't find cost going
to zero, but the process can continue long -
3:23 - 3:27enough so that Dalton, Georgia gets an
overwhelming advantage. So many firms -
3:28 - 3:33locate in Dalton, Georgia producing
carpets that it would be crazy to produce -
3:33 - 3:38carpets anywhere else, because Dalton,
Georgia is where you can easily find the -
3:38 - 3:43workers, where you can easily find the
knowledge, where the suppliers understand -
3:43 - 3:49the business. In Dalton, Georgia, even the
community colleges teach the techniques -
3:49 - 3:55needed in order to produce carpet. So
these virtuous circles can generate -
3:55 - 4:00decreasing costs. Okay, I'm not going to
say anymore about that. I'm going to leave -
4:00 - 4:02it briefly for today.
If you do want to learn more, I've -
4:02 - 4:10provided a bonus lecture which is from
MRUniversity on international trade, -
4:10 - 4:16particularly on trade and external
economies of scale. I talk much more about -
4:16 - 4:20these clusters and their influence on
trade in that video, which you'll also -
4:20 - 4:27find in your course materials. Okay, let's
sum up. So in this chapter, we've really -
4:27 - 4:32done two things. First, based upon profit
maximization in a firm's cost curves, -
4:32 - 4:37we've shown how a firm decides how much to
produce and also when to enter or exit -
4:37 - 4:43an industry. Second, based upon those
production decisions, we've shown how a -
4:43 - 4:49supply curve is built up founded upon the
choices of firms in entering and exiting -
4:50 - 4:55and how much to produce. And we've looked
at three particular cases, the constant -
4:55 - 5:00cost industry with examples of domain name
registration of spoons or waiters, or -
5:00 - 5:07rutabagas has a flat supply curve. Costs
don't change as output of the industry -
5:07 - 5:13changes and so the supply curve is flat.
The increasing cost industry - oil, steel, -
5:13 - 5:19nuclear physicists, costs increase, industry
cost increases, output increases, and as a -
5:19 - 5:25result, the supply curve increases. And
finally the uncommon but important case of -
5:25 - 5:31a decreasing cost industry where at least
over some range and in a particular -
5:31 - 5:38location cost can fall with increased
quantity, and how this type of cost -
5:38 - 5:43structure generates clusters, clusters
like Dalton, Georgia, like Silicon Valley -
5:43 - 5:48and Hollywood, and so forth. Okay, that's
it. Thank you. -
5:48 - 5:54- [Announcer] If you want to test yourself,
click, "Practice Questions," or if you're -
5:54 - 6:00ready to move on, just
click, "Next Video." -
6:00 - 6:00♪[music]♪
- Title:
- Entry, Exit, and Supply Curves: Decreasing Costs
- Description:
-
In this video, we talk about the special case of the decreasing cost industry. As output increases, costs will continue to fall, and more firms will enter which, again, increases output. It’s a virtuous circle!
At the end of this video, we review the major points made in this section. If you find that something doesn’t quite make sense, feel free to re-watch videos as many times as you’d like.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomicsAsk a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/supply-curve-decreasing-cost-industry#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/minimizing-industry-costs-production-invisible-hand
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 06:02
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | ||
Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs |