Entry, Exit, and Supply Curves: Decreasing Costs
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0:01 - 0:06♪ [music] ♪
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0:09 - 0:10- [Alex] Today we're
going to wrap up -
0:10 - 0:13our discussion
of entry, exit and supply curves -
0:13 - 0:15by talking briefly
about the fascinating case -
0:15 - 0:18of the decreasing cost industry.
-
0:18 - 0:28What's important and interesting
about decreasing cost industries is -
0:29 - 0:33that we think
that they explain clusters. -
0:33 - 0:35places like Dalton, Georgia,
-
0:35 - 0:38known as the Carpet Capital
of the world, -
0:38 - 0:42because about 90%
of the world's manufactured carpet is -
0:42 - 0:45made in this one
small town in Georgia. -
0:45 - 0:47Or think about Silicon Valley
for computer technology -
0:47 - 0:50or Hollywood for movies.
-
0:50 - 0:56Or how about Hangji, China
where they make three -
0:56 - 0:59to four billion toothbrushes a year
in this one small town. -
0:59 - 1:00Now what is it about Hangji, China?
-
1:00 - 1:02Is there something special
which makes this town -
1:02 - 1:09just the ideal place in all
the world to make toothbrushes? -
1:09 - 1:11No, not at all.
-
1:11 - 1:14It's not like mining
diamonds or gold. -
1:14 - 1:15Toothbrushes could be
made anywhere. -
1:15 - 1:18Is there anything really
special about Dalton, Georgia, -
1:18 - 1:23which makes it the ideal place
for making carpets? -
1:23 - 1:26No, so why then do we see
these industrial clusters? -
1:26 - 1:33The idea is this: clusters evolve
when greater output decreases -
1:33 - 1:36local industry costs,
and the best way to explain this -
1:36 - 1:39is to give kind
of a stylized history which -
1:39 - 1:41fits the facts for many
of these clusters -
1:41 - 1:44such as the one in Dalton, Georgia.
-
1:44 - 1:47The idea is that the first firm locates
more or less randomly. -
1:47 - 1:50However, the first firm creates
some local knowledge. -
1:50 - 1:55In the case of Dalton, Georgia,
-
1:55 - 1:58it was knowledge
about how to produce carpets. -
1:58 - 2:01It began to train workers
in specialized techniques -
2:01 - 2:03in order to produce carpets.
-
2:03 - 2:06Some input suppliers
for the backing of the carpet, -
2:06 - 2:09for example, also began
to locate in Dalton Georgia. -
2:09 - 2:12So there were advantages
which began to develop -
2:12 - 2:20in Dalton, Georgia simply
because one firm was there already. -
2:20 - 2:23A second firm looking
around the country -
2:23 - 2:26and deciding where to locate
then chooses to locate -
2:26 - 2:31in Dalton, Georgia
next to the first firm, because -
2:31 - 2:33that's where the specialized
inputs already exist. -
2:33 - 2:36That's where there's
some workers -- which already -
2:36 - 2:40understand the technology --
can be more easily found. -
2:40 - 2:41Once the second firm does that,
-
2:41 - 2:43it contributes
to the local knowledge. -
2:43 - 2:50And the third firm looking around
also now finds that costs are -
2:50 - 2:54even lower in Dalton, Georgia
than they are elsewhere, -
2:54 - 2:57and the process continues.
-
2:57 - 2:58You can think about this
as a virtuous circle. -
2:58 - 3:00Output increases
with the first firm. -
3:00 - 3:06That produces some decreases
in costs; costs fall. -
3:06 - 3:09That increases entry
as other firms come into that area -
3:09 - 3:12to take advantage
of those lower costs. -
3:12 - 3:17And that increases output,
and the process continues. -
3:17 - 3:20Of course, the process doesn't
continue forever. -
3:20 - 3:23We don't find cost going to zero,
but the process can continue -
3:23 - 3:27long enough so that Dalton, Georgia
gets an overwhelming advantage. -
3:28 - 3:33So many firms locate
in Dalton, Georgia producing carpets -
3:33 - 3:35that it would be crazy to produce
carpets anywhere else, -
3:35 - 3:38because Dalton, Georgia is where
you can easily find the workers, -
3:38 - 3:43where you can easily find
the knowledge, -
3:43 - 3:46where the suppliers
understand the business. -
3:46 - 3:49In Dalton, Georgia,
even the community colleges teach -
3:49 - 3:55the techniques needed
in order to produce carpet. -
3:55 - 4:00So these virtuous circles can
generate decreasing 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
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs | |
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Kirstin Cosper edited English subtitles for Entry, Exit, and Supply Curves: Decreasing Costs |