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There is a distinction between two types of economies of scale: internal and external. An industry that exhibits an internal economy of scale is one where the costs of production fall when the number of firms in the industry drops, but the remaining firms increase their production to match previous levels.
Krugman argues that economies specialise to take advantage of increasing returns, not following differences in regional endowments (as contended by neoclassical theory). In particular, trade allows countries to specialize in a limited variety of production and thus reap the advantages of increasing returns (i.e., economies of scale ), but ...
With increasing returns to scale, countries that are identical still have an incentive to trade with each other. Industries in specific countries concentrate on specific niche products, gaining economies of scale in those niches. Countries then trade these niche products to each other – each specializing in a particular industry or niche product.
A company may do this via internal expansion or through mergers and acquisitions. [1] [2] [3] The process can lead to monopoly if a company captures the vast majority of the market for that product or service. [3] Benefits of horizontal integration include: increasing economies of scale, expanding an existing market, and improving product ...
If only diseconomies of scale existed, then the long-run average cost-minimizing firm size would be one worker, producing the minimal possible level of output. However, economies of scale also apply, which state that large firms can have lower per-unit costs due to buying at bulk discounts (components, insurance, real estate, advertising, etc.) and can also limit competition by buying out ...
Internal economies of scale are primarily a long-run phenomenon and are due either to reductions in the technical coefficients of production (technical economies=increasing productivity by improved organisation or methods of production) or to discounts resulting from larger size (pecuniary economies). Internal diseconomies of scale can be ...
Gary Becker (1930–2014), the 1992 Nobel prize winner in economics, has mentioned that Milton Friedman and Alfred Marshall were the two greatest influences on his work. Another contribution that Marshall made was differentiating concepts of internal and external economies of scale. That is that when costs of input factors of production go down ...
Krugman's model yields two related predictions regarding the effects of market size asymmetries on the geographic distribution of industry activity. Krugman (1980) demonstrates that a country with larger consumers of an industry's goods will run a trade surplus in that industry characterized by economies of scale.