ECON1101 Lecture Notes - Lecture 35: Economic Surplus, Consumer Spending, Trade Route
ECON1101 Week 12 Lecture B
● INSERT GRAPH OF MARKET FOR CLOTHING (W/O Trade)
○ @Peq: Domestic QD = Domestic QS
○ Consumer surplus:
■ CS = value to consumer - consumer expenditure = A
○ Producer Surplus:
■ PS = producer revenue - producer costs = B
○ World price is the price of a good determined by global market
○ Australia is a small economy relative to the world market i.e. Australian S and D
for a good has little or no impact on world price. Australia is a price-taker.
○ Note: Basic conclusions here for a small economy also largely carry over to a
large economy (e.g. US, China and EU)
● Exporting Country:
○ If World price > domestic price (before trade) => export good (Australia e.g. wool)
○ Why? AUS has a comparative advantage in wool production.
○ INSERT WOOL IN AUSTRALIA GRAPH
■ Move up the supply curve due to an increase in price after trade thus the
Quantity supplied increases thus the quantity demanded decreases.
Hence the difference between quantity supplied and demanded is helped
by exports
○ Price effects with new higher (world) price:
■ P increases => Domestic QD decreases and domestic QS increases
■ Exports = Domestic QS - Domestic QD
○ INSERT THE GRAPH OF DOMESTIC WOOL BELOW THE ONE ABOVE
Before Trade
After Trade
Change
Consumer
Surplus
A + B
A
-B thus
consumers
worse off
Producer
Surplus
C
B + D + C
B + D thus
producers
better off
Total Surplus
A + B + C
A + B + C + D
D
■ Domestic consumers pay more, consume less, and are worse off (Lose
B)
■ Domestic producers charge more, produce more, and are better off (gain
B + D)
■ Total surplus rises by D as producer gains outweigh consumer losses
● Importing Country
○ If world price < domestic price (before trade) => import good (AUS e.g. clothing)
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Document Summary
Insert graph of market for clothing (w/o trade) Cs = value to consumer - consumer expenditure = a. Ps = producer revenue - producer costs = b. World price is the price of a good determined by global market. Australia is a small economy relative to the world market i. e. australian s and d for a good has little or no impact on world price. Note: basic conclusions here for a small economy also largely carry over to a large economy (e. g. us, china and eu) If world price > domestic price (before trade) => export good (australia e. g. wool) Aus has a comparative advantage in wool production. Move up the supply curve due to an increase in price after trade thus the. Quantity supplied increases thus the quantity demanded decreases. Hence the difference between quantity supplied and demanded is helped by exports. Price effects with new higher (world) price: P increases => domestic qd decreases and domestic qs increases.
