ECON1010 Lecture Notes - Lecture 13: Takers, Behavioral Economics, Economic Surplus

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9 May 2018
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All diagrams come from Patricia Ramirez de la Vina’s powerpoint “International Trade and Behavioral Economics”
Lecture 13 Notes - International Trade and Behavioral Economics
International Trade
Imports
Goods produced abroad and sold domestically
Cars, computers, petroleum
Exports
Goods produced domestically and sold abroad
Planes, helicopters, cars
Comparative Advantage
Country has a comparative advantage if it can produce a good cheaper than
other countries
Cheaper produce a good in one country than another
Country will export a good if it has a comparative advantage
Pw = world price of a good
Pd = domestic price
If Pd < Pw, it is cheaper to produce a good domestically
If Pw < Pd, it is cheaper to produce a good in another abroad
Small economies (small countries) are price takers
Assuming all countries are small economies, Pw is the only price
Benefits of International Trade
Consumers have greater variety of goods
Producers sell more because there is a larger market
Lowers costs because they produce on a larger scale
Competition from abroad reduces market power of domestic firms
Export
If Pw = $6, this country is going to export the good
There is a surplus of 450 units at the world price
Surplus is exported
Without trade
Consumer surplus is CS = A + B
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All diagrams come from Patricia Ramirez de la Vina’s powerpoint “International Trade and Behavioral Economics”
Producer Surplus is PS = C
Total Surplus TS = A + B + C
With trade
Consumer surplus CS = A
Producer Surplus is PS = B + C + D
Total Surplus is TS = A + B + C + D
Gain from trade is D
Producer gains from exporting
Import
If Pw = $1500, this country is going to import plasma TVs
There is a shortage of 400 units
Shortage will be imported
Without trade
Consumer surplus is CS = A
Producer Surplus is PS = B + C
Total Surplus is TS = A + B + C
With trade
Consumer surplus CS = A + B + D
Producer Surplus is PS = C
Total Surplus is TS = A + B + C + D
Gain from trade is D
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Document Summary

Lecture 13 notes - international trade and behavioral economics. Country has a comparative advantage if it can produce a good cheaper than other countries. Cheaper produce a good in one country than another. Country will export a good if it has a comparative advantage. Pw = world price of a good. If pd < pw, it is cheaper to produce a good domestically. If pw < pd, it is cheaper to produce a good in another abroad. Small economies (small countries) are price takers. Assuming all countries are small economies, pw is the only price. Producers sell more because there is a larger market. Lowers costs because they produce on a larger scale. Competition from abroad reduces market power of domestic firms. If pw = , this country is going to export the good. There is a surplus of 450 units at the world price. Consumer surplus is cs = a + b.

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