Question

Table 19.15 shows how the average costs of production for semiconductors (the “chips” in computer memories) change as the quantity of semiconductors built at that factory increases.

a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale?

b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors 50,000 semiconductors? 30,000 semiconductors?

c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.

Short answer

a.) As with the rise in the quantity, the average cost of production falls, this is signified by economies of scale.

b.) Till 40,000 the economies of scale can be used as the average cost of production is minimum from 40,000 to 1,00,000. At 30,000 it can not be benefitted.

c.) As international trade increases the demand, firms or even a small economy can increase the production and hence can make use of the economies of scale.

Step-by-step solution

Step1. Introduction 

Economies of scale refer to the concept that with rising production, the average cost of production falls up to a certain level.

Step2. Explanation 

a.

The curve above indicates the falling average cost of production with a rising quantity of production. This is exactly the phenomenon of Economies of Scale.

b.

From 4000 to 100000, the cost of production is assumed to be $2, which is the lowest, hence, economies of scale are taken advantage of.

At 30000, the cost is $3, which is not the lowest as by further expansion, it can be reduced to $2.

c. International trade increases the demand from all over the world, hence the aggregate demand rises. This allows firms of even a small economy to expand and take advantage of economies of scale.