Market for Good X Price Of Good X Quantity of Good X P Domestic * S Domestic * D Domestic * Q e* Domestic 100 “A” P 0 P 1 This economy is “closed” to outside trade . It is in a state of “Autarky”. The Market for Good “X” is in equilibrium at P Domestic and Qe* Domestic at a Quantity of 100
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Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
100
“A”
P0
P 1
This economy is “closed” to outsidetrade .
It is in a state of “Autarky”.
The Market for Good “X” is in equilibrium at P Domestic and Qe* Domestic at a Quantity of 100
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Q e*Domestic
100
P0
P 1
Now assume it decides to become an “Open” Economy and trade with the rest of the world
It comes out of the state of Autarky.
The world price of Good X (“P World”) is lower than the Domestic Price.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
QsDomestic
50
QdDomestic
150
Q e*Domestic
100
P0
P 1
At the lower world price, ceterus paribus, the Quantity Demanded is going to INCREASE to “Qd Domestic (150)” at Point “C”.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
QsDomestic
50
QdDomestic
150
Q e*Domestic
100
P0
P 1
KEY POINT: We move ALONG our respective Demand and Supply Curves because of a CHANGE IN THE PRICE OF GOOD X.
Price Decreases, Quantity Demanded INCREASES (150) We move from Point “A” on the Demand Curve to Point “C”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
QsDomestic
50
QdDomestic
150
Q e*Domestic
100
P0
P 1
…and the Quantity Supplied is going to DECREASE to “Qs Domestic (50)” at Point “B”.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
QsDomestic
50
QdDomestic
150
Q e*Domestic
100
P0
P 1
KEY POINT: We move ALONG our respective Demand and Supply Curves because of a CHANGE IN THE PRICE OF GOOD X.
Price Decreases, Quantity Supplied DECREASES (50) We move from Point “A” on the Supply Curve to Point “B”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
QdDomestic
Q e*Domestic
100
QsDomestic
50
QdDomestic
150
IMPORTS100
P0
P 1
Now we have changed the dynamicsOf the Market Supply Curve for Good X.
Because the Domestic Quantity SuppliedHas decrease to “50” and the Domestic Quantity Demanded has increased to 150 AND we are open to trade that means the difference is made up with IMPORTS of “100” (150-50)
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
QdDomestic
Q e*Domestic
100
QsDomestic
50
QdDomestic
150
IMPORTS100
P0
P 1
Domestic Producers are only going toSupply 50 units of Good X at the Pworld . (From 0 units to 50 units at Point “B”)
So that part of the Supply Curve will remain the same.
(Highlighted in YELLOW).
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
QdDomestic
Q e*Domestic
100
QsDomestic
50
QdDomestic
150
IMPORTS100
P0
P 1
The Supply Curve now diverges from the original one.
At P world it becomes HORIZONTAL to reflect at that price the Quantity Demandedis 100 more than Domestic Producers are willingto supply of Good X (amount from Point “A” to Point “C”)
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
QdDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QdDomestic
150
IMPORTS100
P0
P 1
We can extend the new Supply Curve beyond Point “C” with the assumption that at a higher Price Domestic AND Foreign Producerswill be willing to Supply more of Good X.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
QdDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QdDomestic
150
IMPORTS100
P0
P 1
So, with an Open economy we have a newMarket Supply Curve for Good X that iscomprised of Domestic AND ForeignQuantity Supplied for Good X that lies to The RIGHT of the original Market Supply Curve“S Domestic*)
We label the new Supply Curve
“S Domestic + Imports”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
QdDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QdDomestic
150
IMPORTS100
P0
P 1
Domestic Producers of Good X are NOT going to like this turn of events as it affects their ability to Supply more of this good at a higher Price.
You know, like the good ol’ days at “P Domestic” and “Qe* Domestic(100”)
They are going to seek protection from this low priced foreign Good.
Assume they lobby Congress and the President and get a restriction on theamount of Good X that can be IMPORTED.
This is called a QUOTA.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
“D” “E”
IMPORTS 50
P0
P 1
Assume Producers are successful in getting an IMPORT QUOTA on Good X and the maximum amount that can be imported is 50 units of Good X.
This is represented by Points “D” and “E” and it represents a NEW section of a NEW Supply Curve for Good X that accounts for the Foreign Supply of Good X.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
P0
P 1
IMPORTS 50
The NEW Domestic Market Price for Good Xwill be “P Quota”. The Price INCREASESbecause the Total Supply is LESS than it was before.
(You will see that in a moment when the Supply Curve shifts LEFT)
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B” “C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
P0
P 1
IMPORTS 50
At the higher price the Quantity Demanded DECREASESrom 150 to 125. We move ALONG the Market Demand Curve from Point “C” to “E”.
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“B”“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
P0
P 1
IMPORTS 50
At the higher price the DOMESTIC Quantity SUPPLIED INCREASESfrom 50 to 75. We move ALONG the Market SUPPLY Curve from Points “B” to “D”.
This is the benefit of the Quota derived for Domestic producers of Good X.They get to Supply a larger quantity (75 instead of 50at a higher price BUT this is also the cost to consumers of Good X because they get to Consume LESS of this good (125 instead of 150) and at a HIGHER price
(P Quota instead of P World)
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
We finish out the new Supply CurveAnd get:
“S Domestic + Imports w/quota”
“B”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
To sum up to this point: Our Original Market Equilibrium WITHOUT TRADE was at Point “A”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
Our new market equilibrium WITH tradeWas at Point “C”. (Supply Curve shifted toThe RIGHT with the addition of IMPORTS (100)
“B”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
Our new market equilibrium WITH tradeBUT with a QUOTA is at Point “E”. (Supply Curve shifted toThe LEFT with the RESTRICTIONS of IMPORTS (50)
“B”
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
Dead Weight Loss (DWL) is created as a result of the Quota.
DWL to Consumers is equal to the RED TRIANGLE
Consumers do not get to enjoy a greater quantity of the good (25 Units)The LOWER world price “P World”. It
“B” DWL
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
Dead Weight Loss (DWL) is created as a result of the Quota.
DWL to SOCIETY is equal to the BLUE TRIANGLE
Domestic resources that were NOT allocated to produce Good X before the Quota are now employed to produce the 25 additional units of Good X.
This represents the OPPORTUNITY COST to society for the implementation of the QUOTA.
Economists ask: “Could those freed up resources have been allocated to a more/higher productive use?
“B” DWLDWLDWL
Market for Good X
Price Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*Domestic
P World
“A”
“C”
QsDomestic
S Domestic + Imports
Q e*Domestic
100
QsDomestic
50
QsDomestic
75
QdDomestic
150
QdDomestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS 50
The last part I will leave to you. Locate ALL the areas of SURPLUS (lost and/or gained) as a result of The implementation of a QUOTA. HAVE FUN!!
“B” DWLDWLDWL
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