Question onea) Internal economies of scale are advantages that a firm enjoys for its expansion. They normally occur when an individual firm reduces its costs as its production increases. Internal economies of scale do not depend on entire industry, but rather on the size of individual firm. They only occur in the long run and depends on individual firms actions. A good example of internal economies of scale is when a big firm is able to acquire funds on favorable conditions. External economies of scale normally occur outside a firm, but within an entire industry.
They are achieved if the growth of entire industry or firms’ group results to costs reduction for each firm. External economies of scale do not depend on each firm individual action. A good example of external economies of scale is when industry’s size of operation increases due to development of good transportation network, thus resulting into reduced costs for firms working within the industry. Intra-industry trade is a trade in which a nation import and export within same industry. It is the trading of similar goods and services that belongs to same industry.
A good example intra-industry trade is when Korea imports and exports cars (Eicher et al 220). Dumping refers to a situation in international trade in which a given nation or country floods the market of another country with low priced products. A good example of Dumping is when Japanese exports steel inventories in United States of America market at a price that domestic steelmakers cannot compete with. b) Export subsidy is a government policy that aims at encouraging export of domestically produced commodities and discourages the sale of same products on domestic market.
Import tariff refers to tax imposed by governments on goods and services that are brought into a country. Governments do always impose import tariffs so as discourage domestic consumers from purchasing commodities from foreign countries. Therefore, these two policies have similar effect on aggregate supply. The use of export subsidy reduces aggregate supply since the policy encourages the exportation of domestically produced products and discourages the sale of similar products on domestic market. Import tariffs do also reduce aggregate supply.
Governments do always use import tariffs to discourage importation of goods and services, thus reducing aggregate supply (Krugman et al 185). c)Dynamic economies of scale refer to a situation in which returns to scale increases with a decline in average cost. It normally occurs when average costs reduce as aggregate output over time increases. Dynamic economies of scale can also be referred to as dynamic external economies of scale. A good example of dynamic economies of scale is when a firm uses cheaper inputs such as labor to produce more outputs.
Economies of scale on the other hand are situations in which external factors such as good transport facilities causes the total costs of the firm to go down. In external economies of scale, cost of production normally depends on the entire size of the industry. A good example of economies of scale is when establishment of local education assist local population to acquire skills required to an industry, if the industry is a huge provider for local employment. This therefore makes an industry to incur less cost, particularly on training of staffs.
Dynamic economies of scale and external economies of scale can be illustrated graphically as shown below.