Front

Please define the concepts of supply, demand and market equilibrium.

Back

Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various price levels. As prices increase, the quantity supplied typically increases as well.

Demand represents the quantity of a good or service that consumers are willing and able to purchase at different price points. Generally, as prices decrease, the quantity demanded increases.

Market equilibrium is the point where supply and demand intersect. At this point:

a. The quantity supplied equals the quantity demanded;

b. The market price is at a level where there is no shortage or surplus of goods;

c. Neither buyers nor sellers have an incentive to change their behaviour

Front

Please define consumer surplus and producer surplus in your own words.

Back

Consumer Surplus

Consumer surplus is the extra benefit consumers get when they pay less than they were willing to pay for a product.

Producer Surplus.

Producer surplus is the extra benefit producers receive when they sell a product for more than the minimum price they were willing to accept.

Front

How do we represent these concepts graphically?

Back

Please see lecture notes.

Front

Please explain the relationship between the world price and comparative advantage.

Back

The relationship between world price and comparative advantage is that world prices guide countries to specialise in producing goods where they have a comparative advantage. Countries export goods with lower opportunity costs and import goods with higher opportunity costs, based on world prices. This leads to efficient production and trade benefits.

Front

What typically happens to consumer and producer surplus when a country opens up to international trade?

Can you explain why these changes occur?

Back

When a country opens up to international trade:

Consumer surplus typically increases due to lower prices and greater product variety.

Producer surplus may decrease for domestic producers facing import competition but increase for export-oriented producers.

These changes occur because trade allows countries to specialise based on comparative advantage, leading to more efficient production and lower prices.

Front

On a supply and demand graph, where does the world price typically appear in relation to the domestic equilibrium price (e.g., for an importing country, for an exporting country)?

How do we determine whether a country will be an exporter or importer based on the world price?

If a government imposes a tariff, how does this affect the effective world price faced by domestic consumers and producers?

Back

World Price on Graph:

Importing Country: World price is below domestic equilibrium.

Exporting Country: World price is above domestic equilibrium.

Determining Exporter/Importer:

Importer: World price < domestic equilibrium.

Exporter: World price > domestic equilibrium.

Effect of Tariff:

Raises the effective world price for domestic consumers and producers.

Increases domestic production, decreases consumption, and reduces imports.

Front

What are some potential effects of imposing a tariff on consumer and producer surplus?

Back

Imposing a tariff typically:

Decreases consumer surplus: Higher prices reduce consumer benefits.

Increases producer surplus: Domestic producers benefit from higher prices.

Reduces overall economic surplus: Consumer losses often outweigh producer gains.

Front

How might a quota impact different stakeholders in the economy?

Back

A quota impacts stakeholders as follows:

Consumers: Higher prices, reduced choices, decreased consumer surplus.

Domestic producers: Increased production, market share, and producer surplus.

Foreign producers: Restricted access, reduced sales.

Government: No direct revenue, potential enforcement costs.

Overall economy: Typically a net welfare loss.