Specific factor Model. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Preview Types of economies of scale Types of imperfect competition.

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Presentation transcript:

Specific factor Model

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Preview Types of economies of scale Types of imperfect competition  Oligopoly and monopoly  Monopolistic competition Monopolistic competition and trade Inter-industry trade and intra-industry trade Dumping External economies of scale and trade

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Preview H-O model 2 by 2 --LR Specific model: 3 by 2—SR Technology: homogenous degree of one Market structure: perfect competition Y 1 =f(K 1, L 1 ); Y 2 =f(K 2, L 2 ) Labor equilibrium condition Profit=p 1 Y 1 -WL 1 -r 1 K 1

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. W=P 1 *MP L1 W=P 2 *MP L2 Product function is increasing and concave. L1 up, MPL1 down Diminishing returns to Marginal labor product K1 up, L1 down, MPL1 up ( Wicksell’s Law)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. W P 1 MPL 1 L1

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. W W P1MPL1 O1 O2

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. P1 INCREASES  WAGE Wage increases, but the percentage of its increase is less than the percentage increase of price. S-S theorem: HO model : what> p1hat> p2hat> rhat Specific factor model: r1hat>p1hat>what>p2hat>r2hat Magnification effect still exists in the specific factor model though the wage change is caught in between.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. K1 INCREASES  Y1 ? W W P1MPL1 O1 O2

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. K1 INCREASES  Y1 ? Specific endowment increases  L1 up,  y1 up K2 fixed, but L2 down,  y2 down Rybcyznski theorem still holds!

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. K1 INCREASES  Y1 ? W W P1MPL1 O1 O2

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. L INCREASES  Y1 ? Y2 ? L1 up, K1 fixed,  y1 up W down  MPL2 down  L2 up,  y2 up An increase of mobile factor (labor) does not have the Rybcyznski effect.