Ubc Econ

F a i r

D e a l i n g

( S h o r t

E x c e r p t )

Reading: Chapter 8: Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises (International economics) Author: Melitz, Marc J; Obstfeld, Maurice; Krugman, Paul R Publisher: Pearson Addison-Wesley Publication Date: c2012. Pages: 155-191

Course: 2014W1-ECON355-004-Introduction to International Trade-Swiecki Course Code: 004 Term:

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Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

n this chapter, w e continue to explore how econom ies of scale generate incentives fo r in te rn a tio n a l sp e cia liza tio n and trade. W e now focus on economies of scale that are internal to the firm . As mentioned in the previous chapter, this form of increasing returns leads to a market structure that features im perfect com petition. Internal eco n o m ies o f scale im ply that a firm's average cost of production decreases the more output it produces. Perfect com petition that drives the price of a good down to marginal cost w o u ld im ply losses for those firms because they w ould not be able to recover the higher costs incurred from producing the initial units of output.1 As a result, perfect com petition w ould force those firms out of the...