ECON10004 Lecture Notes - Lecture 7: Opportunity Cost, International Trade, Indirect Tax
27 Jul 2018
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Wellbeing total surplus to society = cs + ps. Efficiency quantity traded that maximises total surplus. Total net gain from each unit traded: (b - p) + (p - c) = b - c. Countries specialise in production of goods/services for which they have relatively low opportunity cost of supply. Don"t produce all they need so they need to trade to buy the goods/services they want to consume. Australia is "small" so it can"t affect world price. Hence, australian buyers/sellers are price-takers at the world price. International trade expands opportunities for mutually beneficial trade. Domestic buyers/sellers can either trade between themselves or in the world market. Area c: cost of units from qs to q* is lower now with trade because wp is lower than domestic opportunity cost of production for those units. Area d: the gain from extra consumption because wp < p* Welfare in the country will always go up when opening to trade.
