ECON 200 Lecture Notes - Lecture 11: Opportunity Cost, Market Power, Economic Surplus

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orangecamel475

27 Dec 2016

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Department

Economics

Course

ECON 200

Professor

Ken Ho

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ECON 200 Full Course Notes

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The world price of a good is the price that prevails in the world market. The domestic price is the price of the wood w/o trade. If the world price is greater than domestic price, then the country has comparative advantage in the good: this means that the country will export. If world price is less than domestic, then the country doesn"t have comp adv so the country will import the good. A small economy is a price taker in the world market this assumption isn"t always true but it helps simplify the model. When domestic price is larger, it makes producers worse off because they have to sell the goods at a lower price: for consumers, they are better off because they get to pay less. Whether a good is imported or exported, trade creates winners and losers. Producers sell to a larger market, may achieve lower costs by producing on a larger scale.

Related Questions

1. An import tariff

a. lowers the domestic price of the exported good below the world price.

b. keeps the domestic price of the exported goods the same as the world price.

c. raises the domestic price of the imported good above the world price

d. lowers the domestic price of the imported good below the world price.

2. Which two accounts are included in the balance of payments:

a. current account and the reserve account.

b. current account and the trade account.

c. current account and the capital account.

d. trade account and the capital account.

3. A producer has a comparative advantage in the production of a good when the producer:

a. has a production cost that is less than sales revenue.

b. has the highest cost of production compared to any other producer.

c. is comparatively more efficient at producing the good than it is at producing anything else.

d. specializes through the use of an assembly line.

4. According to the Fischer effect, if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent, the "nominal" interest rate will be _____.

5 percent

B.	13 percent

9 percent

36 percent

bluetortoise611

2. Winners and losers from free trade

Consider the market for meekers in the imaginary economy of Meekertown. In the absence of international trade, the domestic price of a meeker is $21. Suppose that the world price for a meeker is $22. Assume that Meekertown is too small to influence the world price for meekers once they enter the international market.

If Meekertown allows free trade, then it will meekers.

Given current economic conditions in Meekertown, complete the following table by indicating whether each of the statements is true or false.

Statement	True	False
Meekertownian consumers are worse off under free trade than they were before.
Meekertownian producers are worse off under free trade than they were before.

True or False: When a country is too small to affect the world price, allowing for free trade will always increase total surplus in that country, regardless of whether it imports or exports as a result of international trade.

True

False

Explain how the United States, being a large economy with an abundance of natural resources, labor, and capital, can benefit by not being in autarky. It was shown in the video that the United States had the comparative advantage in burgers. Using the table below, show and explain how Mexico has the comparative advantage in phones. From your answer in the previous question, what is the opportunity cost of burgers for the United States, i.e. how many burgers must the United States give up to produce one phone? What would be an agreeable terms of trade for 1 phone? At the end of the video, a supply and demand graph of the phone market for both countries was shown. Explain why Mexico exported phones to the United States. Suppose, the market for burgers was shown rather than the market for phones in the supply and demand graphs. For the United States to export burgers and Mexico to import burgers, what would world price need to be. in each country, relative to the domestic price? Lastly, explain what a tariff is and the effect it can have on burger imports for Mexico.

ECON 200 Lecture Notes - Lecture 11: Opportunity Cost, Market Power, Economic Surplus

ECON 200 Full Course Notes

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