ECON101 Lecture Notes - Lecture 11: Deadweight Loss, Economic Surplus, Trade Restriction

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2 Aug 2016
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Class 11 – chapter 9 and 13
Chapter 9
Pw and Pd will match if a country engages in trade
oPd will go up or down to match the Pw
With exporting (Pw is above old equilibrium Pd) – suppliers gain
oCS = the new price (Pw) to the demand curve
oPS = the new price (Pw) down to the supply curve, + the amount exported
Amount exported = area of triangle created below Pw and above old
equilibrium
oTs includes exports as well
With importing (Pw is below the old equilibrium Pd) – consumers gain
oCS = the new price (Pw) up to the demand curve + amount imported
Amount imported = area of triangle created above Pw and below old
equilibrium
oPs = the new price (Pw) down to the supply curve
oTs includes imports as well
Benefits of international trade
oLarger variety of goods
oProducers have access to a larger market, which makes a smaller cost through
economies of scale
oCompetition abroad may reduce market power of some firms (which is good for
some consumers as it causes the price to go down)
oTrade enhances the flow of ideas and facilitates the spread of technology around
the world
Opposition to trade
oThere are still losers in trade (if Pd is higher than Pw, consumers do well, but
producers will lose)
oLosses are often highly concentrated among a small group of people who feel
the loss acutely
Trade restriction
oTariff: tax imposed by an importing country when an imported good crosses its
boundary
Price buyers and sellers face domestically is Pw + T
T being the tariff
Is put in place if producers need help to survive in the market with a Pw
that is much lower than the Pd
Impact: increases the Pw, which then increases Pd
Also decreases international trade
Less of a consumer surplus but more of a producer surplus
Government also gets a revenue (tariff price plus the new amount
consumed)
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