Price, cost (per widget) Assume that there are 2 countries, country A and country B and they produce the same good. Before trade, price in country A is lower than it is in country B. Explain the relationship between external economies, output and prices before and after trade step by step by using the relevant graphs. FIGURE 7.1 External Economies and Market Equilibrium When there are external economies of scale, the average cost producing a good falls as the quantity produced rises. Given competition among many producers, the downward-sloping average cost curve AC can be interpreted as a forward-falling supply curve. As in ordinary supply and demand analysis, market equilibrium is at point 1, where the supply curve intersects the demand curve, D. The equilibrium level of output is Qy, the equilibrium price : 1 P AC D Q Quantity of widgets produced, demanded