Question

1) What is internal economies of scale? And why would it be a source of trade? What are the gains of trade in the presence of internal economies of scale?

2) Using graph please explain how performance differences in an industry with internal economies of scale creates winners and losers after trade? Explain step by step.

Answer 1

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1.

Internal economies of scale refers to a decrease in the average costs of production as firms Increase their scale of operations.

This can occur due to increase in Management efficiency or better team management.

It is a source of trade because it gives the firm an advantage over other firms to sell their output in the market with lower costs or higher profit margins.

In presence of internal economies of scale, the gains of trade are higher production and lower opportunity cost of production.