Geoscience Reference
In-Depth Information
world market is a precondition for perfect—or at least free—competition for many
tradable goods.
The total number of firms in the world market,
N
, for a good is then determined
as:
¼
=
ð
;
ð
:
Þ
N
Total demand
x opt
5
11
Total demand is determined by the distribution of consumers in space and the
minimal A, facing each consumer. However, with any spatial consumer distribu-
tion, the total number of firms would be decreasing with the
duration of produc-
tion process and with the durability of the good
being analyzed.
An increased fixed cost, as influenced by an increased duration of the production
process and durability of the good produced reinforce each other in decreasing the
number of firms if the demand of the world market is given. In some cases the
number of firms could be so severely constrained, that the assumption of perfect or
free competition cannot be upheld even if the product is globally traded. Examples
are trains, ships, airplanes and nuclear reactors, which are produced only in a few
locations, serving a global market. These firms have an extremely long duration of
production from the initial research stage through many stages of laboratory
experiments.
The number of firms is thus determined by the procedure given above, but not
the geographical locations of firms For that a connection with the theory of location
and trade is needed. A theory of location and trade summarizing the contributions
by Ricardo, von Th¨nen, Heckscher and Ohlin, Isard and Beckmann is the varia-
tional inequality model as formulated by Anna Nagurney (
1999
). In her model
demand at each location and supply in each location is represented dually by the
prices announced in the locations. An increased flow of a good from a location to
another requires the price difference to be larger than the sum of logistics (including
interest) cost, associated with a unit trade flow between the two locations, possibly
at different instances of time.
The pattern of location and trade flows comes to an equilibrium when each good
price difference is equal to (or smaller than) the sum of transaction and transport
costs. As we have seen above the durability of each good determines their logistics
cost. The larger the durability of the good the smaller is this cost. Trade will
increase until there are no price differences between different locations for the
limiting case of extremely large durability of a good. For goods of extreme
durability and low logistical cost the law of one price must rule. An example is
the pricing and trading in currencies.
5.9
Infrastructure: Capital That Is Durable and Public
Equilibrium theory and associated models have provided the fundaments for
modern theoretical and applied economics. But they are inadequate in at least one
important respect. These theories and models are not compatible with the dynamics
