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Chapters for Midterm

by: Andrea Lowe

Chapters for Midterm Principles of Microeconomics 201

Andrea Lowe
GPA 3.1
Zachary Machunda

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About this Document

Zachary Machunda
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Popular in Microeconomics

Popular in Economcs

This 20 page Bundle was uploaded by Andrea Lowe on Friday October 9, 2015. The Bundle belongs to Principles of Microeconomics 201 at Ohio State University taught by Zachary Machunda in Fall 2015. Since its upload, it has received 12 views. For similar materials see Microeconomics in Economcs at Ohio State University.


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Date Created: 10/09/15
Economics Chapter One 0 What is economics 0 A social science concerned with making optimal choices under conditions of scarcity 0 Economic wants exceed productive capacity I If wants didn t exceed our productive capacity everyone would have everything they ever wanted 0 Have to make choices the choices we make are the best options available given the circumstances 0 The Economic Perspective 0 The lens that economists use to view the world 0 Key features I Scarcity and choice I Purposeful behavior I Marginal analysis 0 Scarcity and choice 0 Resources are scarce O Choices must be made 0 Opportunity cost I there s no free lunch I there is a cost to every choice 0 ie the cost to take this class what could you be doing instead I everyone s opportunity cost will be different 0 Purposeful Behavior 0 Rational selfinterest I Individuals and businesses make rational decisions at the time these decisions seem beneficial 0 Individuals and utility I Every choice provides utility I Rational selfinterest goal is to maximize utility at the end of the day I Receive utility when we help others I Wrong decisions can be made 0 Firms and profit I Firms are rational because they try to maximize their profits 0 Desired outcomes 0 Marginal Analysis 0 Marginal extra 0 Marginal benefit I Will choose to do something if the marginal benefit outweighs the marginal cost because that s rational and will maximize utility I that s not worth it 0 Marginal cost 0 Theories Principles and Models 0 The scientific model I Observeljformulate a hypothesisDtest the hypothesisljaccept reject or modify the hypothesisljcontinue to test the hypothesis if necessary I Causes the creation of principles and theories 0 Generalizations about economic behavior that are true to the average person 0 Principles are imprecise but still relevant I Impossible to create principles that are true to every person 0 Otherthingsequal assumption ceteris paribus assumption which is common in many sciences 0 Graphical eXpression graphs used to illustrate relationships between variables 0 Microeconomics and Macroeconomics 0 Micro decision making by individual units I Specific types of industries or certain types of individuals 0 Macro combinedtotal I Entire economy I Basic subdivisions of the economy government households businesses international trade 0 Positive and normative economics 0 Positive deals with economic facts I Supported or disproved with data no subjectivity O Normative a subjective prospective of the economy I What ought to be I Standard or norm for the economy to achieve I Subj ective everyone has different opinions about what is acceptable 0 Individual s Economizing Problem 0 Limited income 0 Unlimited wants 0 A budget line used to illustrate the greatest combinations of two goods that can be purchased with a certain amount of income I Re ects the greatest amount of these two goods that can be purchased 0 Any combination of goods inside the budget line can be purchased but that combination is not representative of the maXimum that could be purchased 0 Illustrates how much of one good must be sacrificed to get more of another good opportunity costs I Created for a specific level of income so that when income changes the budget line must shift to shoe the higher or lower incomes I Attainable and unattainable options I Tradeoffs and opportunity costs I Make the best choice possible 0 Change in income I Higher budget line will shift to the right more purchasing options 0 Higher standard of living I Lower budget line shifts to the left less purchasing options 0 Society s Economizing Problem resources are scarce not income 0 Resources inputs used in the production of other goods and services money is not a resource I Land all natural resources I Labor most people who work and contribute to the production of a good or service I Capital all manufactured inputs not the same as money I Entrepreneurial Ability 0 Takes initiative 0 Makes decisions 0 Innovates 0 Takes risk 0 Isn t just a successful businessperson who makes money Production Possibilities Model 0 Illustrates production choices I Shows the maXimum combinations of two goods that can be produced with the resources available 0 Tradeoff between choosing those goods Production possibilities curve producing on the blue line means production is efficient anywhere within the blue line is inefficient the economy has idle resources that aren t being used to capacity Assumptions I Full employment using all available resources and they re being used to their potential I Fixed resources I Fixed technology I Two goods Optimal allocation 0 0 How much to produce based on how a person makes decisions Optimal amount of pizza where the marginal benefit is equal to the marginal cost of producing another unit of pizza A growing economy 0 Economic growth I More resources amp better resources available 0 Can produce more goods and services 0 Can use fewer resources to produce the same output freeing some resources to increase the output of other goods I Improved resource quality I Technological advances 0 Enables economies to produce a larger amount of goods and services with fewer resources 0 Greater output of all goods and services I Results in higher standard of living Present goods goods that satisfy needs today and do nothing for us in the future Future goods capital education research and development International trade 0 0 Resources are allocated more efficiently essentially equivalent of an increase in resources Specialization specialize in the production of goods which they produce more efficiently than other countries Increased production possibilities 0 Can take advantage of foreign resources 0 Rightward shift of the PPC 0 Pitfalls to Sound Economic Reasoning O Biases O Loaded terminology news uses this to gain audiences attention 0 Fallacy of composition when we assume that what benefits one person will also benefit others 0 Post hoc fallacy don t draw conclusions about cause and effect relationships superstitions 0 Correlation not Causation events may be related but it doesn t mean one caused the other What is scarcity Opportunity Cost how are they related What is the difference between microeconomics and macroeconomics Positive and normative economics What is the indiVidauals39 economizing problem How can trade offs and opportunity cost be illustrated using the budget lines What are the scarce economic resources What is the PPC How is it used to illustrate the society39s economizing problem and the opportunity cost What is meant by increasing opportunity cost How can international trade shift or increase a Country39s PPC Chapter 2 the Market System and the Circular Flow 0 Economic systems 0 Set of institutionalized arrangements 0 Coordinating mechanism to solve economic problems 0 Differences in systems exist by Degree of decentralized use of markets and prices in decision making in a country Degree of centralized government control used to direct economic activity in that country LaissezFaire Capitalism 0 Ideal economic system 0 quotkeep the government from interfering with the economyquot no need for government interference in markets because the system is self correcting 0 Power of government is needed to Provide a legal environment for protection Protect private property from theft Provide a legal environment for contract enforcement 0 People interact in markets to buy and sell 0 The Command System 0 Known as socialism or communism 0 Government ownership of resources 0 Economic activity and decisions made by a central planning board Decide what is produced how much and the prices that are charged for the output 0 Many countries are reducing reliance on central planning and implementing marketoriented systems 0 Mainly communist countries North Korea Cuba Myanmar 0 The Market System 0 A mix of decentralized decision making with some government control resources owned by private individuals and institutions 0 Markets and prices coordinate and direct economic activity 0 Selfinterested behavior each participant acts in his or her own self interest 0 Monetary rewards possible but not without some degree of nancial risk 0 Systems found in much of the world 0 Private markets are dominant force private ownership of resources 0 Characteristics of the Market System 0 Private property Private individuals and rms own most of the private property resources of land and capital Encourages investment innovation exchange of assets maintenance of property and economic growth Property rights extend to intellectual property through patents copyrights and trademarks 0 Freedom of enterprise freedom to negotiate binding legal contracts Entrepreneurs and businesses have the freedom to obtain and use resources to produce products of their choice and to sell these products in the markets of their preference 0 Freedom of choice individuals and businesses obtain control use and dispose of property Use resources as they choose workers can choose the training occupations and job of their choice consumers are free to spend their income in such a way as to best satisfy their wants 0 Selfinterest one of the driving forces Entrepreneurs try to maximize pro ts minimize losses resource suppliers try to maximize income consumer maximize satisfaction Each tries to maximize pro ts income satisfaction Economy bene ts if competition is present 0 Competition Requires two or more independently acting buyers and sellers Decentralize economic power Requires freedom to enter or leave the markets 0 Market and prices re ects the decisions made on each side of the market and determines the set of product and resource prices that guide owners entrepreneurs and consumers as they all make choices based on their respective selfinterests Technology and Capital Goods 0 Advanced technology and capital goods are encouraged Market systems reward individuals and businesses for development of new technologies thereby encouraging their development and implementation 0 Specialization allows economies to take better advantage of their resources and their capabilities Division of labor of human specialization increases productivity by making use of differences in abilities fostering learning by doing and saving time Geographic specialization regional or international Use of Money whatever society accepts as a medium of exchange is money 0 Money makes trade easier 0 Medium of exchange 0 Without money people would have to barter nd someone that has what you want and nd someone who wants what you have 0 Active but limited government 0 Market system promotes ef ciency it has shortcomings over production of goods that has social costs and an underproduction of goods that has social bene ts Tendencies for businesses to increase monopoly power Misallocation of resources 0 Government may be needed to alleviate market failures O 0 Government can increase effectiveness of a market system Possible government failure The ve Fundamental Questions 00000 0 What goods and services will be produced How will the goods and services be produced Who will get the goods and services How will the system accommodate change How will the system promote progress All economies must address these questions What will be produced 0 O O Goods and services that create a pro t Pro t the difference in total revenues and total costs Consumer sovereignty quotdollar votesquot Consumer decides what will be produced through dollar votes for a product 0 not enough votes the rm will cease production of that product Method for consumers to determine which goods will be produced Determines which products and industries survive or fail Businesses match production choices with consumer choices or else face losses and bankruptcy How will the goods be produced 0 O O 0 Competition between rms forces producers to use most ef cient production techniques otherwise the rm will be driven out of business Minimize the cost per unit by using the most ef cient techniques Technology Prices of the necessary resources Determine the most ef cient production technique Choose the least costly method because it is this method that leads to the greatest pro t or less minimization Total revenue total cost economic pro t or loss Who will get the output 0 0 Consumers with the ability and willingness to pay will get the product Ability to pay depends on income depends on the amount of resources the person has and the price those resources obtain in the market How will the system change 0 0 Market system able to adapt quickly to changes in consumer preferences Changes in consumer tastes Changes in technology Changes in resource prices Affects cost the producer faces when producing goods changing the amount of the good that will be produced and the price of the good o How will the system progress 0 Entrepreneur rms that introduce popular new products will be rewarded with increased revenue and pro ts 0 Technological advance market system promotes technological improvements and capital accumulation New technologies that reduce production costs and production price will spread rapidly throughout the industry as a result of competition Create destruction occurs when new products and production methods destroy the market positions of rms that are not able or willing to adjust 0 Capital accumulation market system provides the resources necessary to produce more capital goods through the increased dollar votes for capital goods Entrepreneurs and business owners are able to purchase more capital good as they become more and more pro table The invisible hand 0 Adam Smith father of economics Emphasis on the role of selfinterest in motivating economic activity 0 Virtues of the market system Ef ciency selfinterested behavior of both the business and the suppliers of resources result in the greatest amount of economic ef ciency Market system guides resources into the production of the goods and services most desired by society Enforces use of the most ef cient production techniques while encouraging new production techniques Encourages skill acquisition and hard work you will be rewarded for your efforts Freedom entrepreneurs and workers are free to make choices based on their own selfinterest The demise of Command Systems 0 Command system was a failure Failure along supply chain because one factory s output was another factory s input one failure would cause a chain reaction No indicators of success such as in market systems with pro t or loss to indicate how successful the rm is No price signals to indicate more or less of a product was desired resulting in surpluses and shortages o Soviet Union Eastern Europe China 0 The coordination problem Set output targets for all goods 0 The incentive problem No adjustment for surplus or shortage The circular ow model 0 O O O The circular ow diagram a simple economic model showing a private closed economy in which there is only a private sector consisting of households and businesses who interact with each other in the markets Real ow consists of resources owing from households and used in producing products that ow from businesses money ow facilitates the workings of the economic system Households housing unites occupied by one or more persons Owners of the resources selling their resources in the resource market and income ows into the households The ones who buy the goods and services in the products market The prices that are paid in the products markets are determined by supply and demand Businesses combine resources and attempt to earn pro ts for the owners by offering goods and services for sale Buy the resources providing income to the households Buy the resources to produce goods and services that are then sold in the products market to households Firms sell their products receiving revenue Sole proprietorship a business owned and managed by a single person Partnership business owned and managed by two or more persons Corporation an independent legal entity that can engage in any legal business activity Product market and the resource market The real ow and the money ow A simple economy consists of households and businesses no government How the system deals with risk 0 O Pro tability depends on how well risk is managed pro ts ow to owners as their reward for bearing the risk of losses Business owners and investors face risk Losses due to input shortages Changes in consumer tastes Natural disasters that affect the supply chain 0 Employees and suppliers have security Paid whether the rm makes a pro t or not Shuf ing the deck 0 Extremely large number of ways to arrange a deck of cards 0 Arrangement of economy39s resources is even larger 0 Avoid random outcomes in market due to Private property Rational decisions about property Economics Chapter 3 Demand Supply and Market Equilibrium Markets 0 Interaction between buyers and sellers 0 May be local national international 0 Price is discovered in the interactions of buyers and sellers 0 Competitive markets many buyers and sellers acting independently 0 Local market farmer s market 0 National market US real estate market 0 International market New York Stock Exchange 0 Demand 0 To be part of demand for a good consumers have to be willing and able to purchase the good When deriving demand assuming the only factor that causes consumers to buy more or less is the price of the good assume all other factors are constant 0 Demand schedule or demand curve amount consumers are willing and able to purchase at a given price Inverse relationship between price and quantity lower quantity at higher prices higher quantity at lower price 0 Individual demand 0 Market demand derived by summing the individuals demand curves 0 Law of Demand other things equal as price falls the quantity demanded rises and as price rises the quantity demanded fails Explanations price acts as an obstacle to buyers keeps them from buying everything they want with limited income consumers will buy more at lower pnces Law of diminishing marginal utility the decrease in added satisfaction that results as one consumes additional units of a good or service ie the second quotBig Macquot yields less extra satisfaction utility than the rst additional units yield less utility the price has to be lower to make up for less utility Income effect a lower price increases the purchasing power of money income this enables the consumer to buy more at a lower price or less at a higher price without having to reduce consumption of other goods 0 Substitution effect a lower price gives an incentive to substitute the lowerpriced good for the now relatively higherpriced goods Determinants of demand the things that can shift the entire demand curve causing demand to change 0 Change in consumer tastes and preferences If most consumers experience the same change in tastes for a particular good the demand for the good will change Preferable change in tastes demand will increase Unfavorable change in tastes demand will fall 0 Change in the population number of buyers More buyers in the market for a good demand increases amp vice versa 0 Change in income Normal goods goods that we buy more of as our incomes increase most goods we buy income and demand move in the same direction lnferior goods goods we buy more of as our income decreases fewer as our income increases income and demand move in opposite direction 0 Changes in prices of related goods Complementary good goods we consume jointly isn39t bene cial to have one without its complement when price of one increases the demand for the other decreases ie cell phones and cell phone service tuition and textbooks lf price of PB increases the quantity demanded of peanut butter decreases as well as demand for jelly Substitute good goods we use in place of another without any loss of satisfaction price of one good increases the demand for its substitute increases ie Colgate and Crest toothpaste Nike and Reebok shoes gsr that take the place of another gsr if price of butter increases the demand for margarine will increase while the quantity demanded of butter decreases 0 Change in consumer expectations Future prices if consumers expect the future price to be higher demand increases future price is lower demand decreases Future income if consumers expect future income to rise they increase purchases now future income to be less reduce demand Supply to be part of supply of a good producers have to be willing and able to produce the good assume only factor that causes rms to produce more or less is the price of the good all other factors assumed constant 0 Supply schedule or a supply curve amount producers are willing and able to sell at a given price 0 Individual supply 0 Market supply created by summing the individual rms39 supply curves Law of supply other things equal as the price rises the quantity supplied rises and as the price falls the quantity supplied falls 0 Price acts as an incentive to producers 0 At some point cost will rise 0 Price and quantity supplied are directly related upsloping curve 0 Producers will offer more of a product for sale as its price rises and less of the product for sale as its price falls Determinants of supply 0 A change in resource prices resource pricesinput prices go up supply decreases input prices go down supply increases 0 A change in technology increases supply increases if using less ef cient technology supply decreases O A change in the number of sellers rms increases supply increases economic pro ts in the market draw producers from less pro table markets into this market If number of sellers decreases supply decreases Economic losses in the market cause producers to leave market A change in taxes and subsidies taxes placed on producers taxes are increased supply decreases taxes decrease or eliminated supply increases lf subsidies are increased supply increases decreased decrease A change in prices of other goods price of another good that the producer could produce with the same resources rises the supply decreases for the product the producers are currently producing lf price falls the supply for the current produced product increases A change in producer expectations if producers expect the price of the product they are producing will be higher in the future they cut back on current supply and supply will decrease lf expected price is lower they increase the current supply Changes in exogenous factors that affect production weather natural disasters 0 Market Equilibrium O O O Equilibrium occurs where the demand curve and supply curve intersect Equilibrium price known as the marketclearing price equilibrium price and quantity are where the supply and demand curves intersect not correct to say supply equals demand Surplus and shortage Rationing function of prices the ability of competitive forces of supply and demand to establish a price where buying and selling decisions are coordinated prices above equilibrium there s an excess quantity supplied ie surplus At prices below equilibrium there39s an excess quantity demanded ie shortage At equilibrium markets are economically ef cient Ef cient allocation 0 O Productive ef ciency producing goods in the least costly way using the best technology using the right mix of resources Sellers that don39t achieve the leastcost combination of inputs will be unpro table and have dif culty competing in the market Can occur without allocative ef ciency goods can be produced in the least costly method without being the most wanted by society Allocative ef ciency producing the right mix of goods combination of goods most highly valued in society Competitive process generates allocative ef ciency Requires productive ef ciency o Allocative and productive ef ciency occur at the equilibrium price and quantity in a competitive market resources are neither overallocated nor underallocated based on society s wants Rationing function of prices the ability of forces of demand and supply to establish a price at which selling and buying decisions are consistent 0 Prices automatically rise and fall and bring a market closer to equilibrium prices are the best tool for eliminating market shortages and surpluses Changes in demand and equilibrium 0 Increase in demand results in an increase in price and an increase in quantity exchanged o Decrease in demand results in a decrease in price and a decrease in the quantity exchanged Changes in supply and equilibrium 0 Increase in supply results in decrease in price and an increase in quantity exchanged o Decrease in supply results in increase in price and a decrease in the quantity exchanged Government set prices 0 Price ceilings maximum prices that can be charged on a good set on goods considered to be necessities Set below equilibrium price equilibrium price is set so high many people are unable to purchase the item price set below to be effective Rationing problem shortage making it dif cult to determine how to ration the limited output for all the consumers who are willing and able to buy the good Often leads to black markets where the good is sold at a higher price than the price ceiling Distort the ef cient allocation of resources Summary maximum legal price Ceiling price is below the equilibrium price causing a shortage 0 Price oor a minimum price xed by the government a price at or above the price floor is legal a price below is not Prices are set above the market price Chronic surpluses ie minimum wage law 0 legal market for human organs 0 organ transplants common but not everyone who needs one can get one o shortages because there is no market for human organs 0 demand curve would resemble others a greater quantity would be demanded at low prices 0 organs rationed by a waiting list have a zero price quantity demanded exceeds the quantity supplied 0 positive effects increase the incentive to donate Eliminate the persistent shortage of eyes livers hearts kidneys etc 0 negative effects diminishes the special nature of life by commercializing it the market would leave out the poor and uninsured increases the cost of medical care 0 Exchange rates prices of one country s currency in terms of another country s currency 0 Currency appreciation value of one of the currencies in terms of the other has increased Occur as the demand for a country39s product increases around the world the demand for that country39s currency will increase increases the value of that country39s currency 0 Currency depreciation value of one of the currencies in terms of the other has decreased Home country sells more of the home country39s currency to buy the other currency increases the supply of the home currency which decreases the value of the home currency 0 Supply shifts right 0 New technology 0 New sellers enter the industry 0 Demand shifts left 0 Increases in consumers39 income 0 Reductions in the price of substitutes Summary 0 Law of demand an increase decrease in the price of a gsr leading to a decrease increase in the quantity demanded Qd of the same gsr a movement ALONG the demand curve 0 Demand curve is stationary o If price is changed the quantity demanded changes moving ALONG the demand curve 0 If any other factor affects consumption the entire demand curve will shift 0 Demandconsumption Law of supply an increase decrease in the price of a gsr leads to an increase decrease in the Quantity supplied Os of the same gsr this is a movement ALONG the supply curve 0 Change in price will stay along the supply curve 0 Increase priceincrease quantity supplied 0 Changes in any factor besides the price of the item will shift the entire supply curve O Shifts in demand does NOT cause a shift in supply but it changes price so you slide along the supply curve amp vice versa Equilibrium state of balance from which there is no incentive to move from QsQd Shortage demand outweighs supply Surplus supply outweighs demand Increase in demandincrease in price and quantity Decrease in demanddecrease in price and quantity Increase in suppydecrease in price increase in quantity Decrease in suppyincrease in price decrease in quantity Types of demand and supply 0 0 Individual demand quantity demanded by an individual consumer for a single product at various prices Market demand quantity demanded for a single product by a group of consumers found by summing the quantity demand of individuals at each respective price Aggregate demand demand for all goods and services at a various average price level macroeconomics Individual supply quantity supplied of a single product by one producer at various prices Market supply quantity supplied of a single product by all producers found by summing the quantity supplied of each producer at each respective price Aggregate supply the supply of all goods by all rms macroeconomics Government interference in market places 0 Market failure the situation in which the market determined equilibrium doesn39t meet the needs of society or the government If not enough is being produced the price is too low the government introduces a price floor Price oor the lowest legal price a gsr can be sold for effective when placed ABOVE the equilibrium creates a surplus If price is too high government uses a price ceiling Price ceiling highest legal price a gsr can be sold at effective when placed BELOW the equilibrium creates a shortage Economics Chapter 24 International Trade 0 International trade 0 Allows countries to grow 0 Allows access to key resources and ways to exchange its own key resources for other items needed 0 US founded on it as Christopher Columbus discovered the new world while looking for a new route to engage in international trade 0 Canada is America s largest trade partner extensive border 0 Economic basis for trade 0 Bene ts of trade in three facts The distribution of natural human and capital resources is uneven among nations Not all nations have the same degree of technology People have different preferences Nations have different resource endowments o Laborintensive goods ie China abundant supply of cheap labor 0 Landintensive goods ie countries with an abundance of natural resources 0 Capitalintensive goods ie industriallyadvanced nations to produce goods that require large amounts of capital at a low cost 0 the type of goods countries produce may change as their economies change and evolve absolute advantage exists when one nation is the most ef cient producer of a good meaning it can produce the good at the lowest possible price comparative advantage used to explain the relationship between specialization and international trade 0 country can produce the good at a lower opportunity cost 0 production possibilities curve illustrates the opportunity cost for each product in each country the relationship between the resources 0 assumptions two nations same size labor force constant costs in each country different costs between countries US absolute advantage in both 0 Opportunity cost ratio Slope of the curve Vegetables sacri ced per ton of beef 0 Selfsuf ciency output mix 0 Specialization and trade produce the good with the lowest domestic opportunity cost each nation only produces the good it has the comparative advantage in imports all other goods for which it has a comparative disadvantage o Opportunity cost of 1 ton of beef 0 1 pound of vegetables in US a 11 ratio 2 pounds of vegetables in Mexico a 12 ratio With trade US will get more than 1 ton of vegetables for one ton of beef and Mexico will get more than 12 ton of beef for 1 ton of vegetables 0 Gains from trade Trading possibilities line shows that both countries end up better off with trade Slope equals terms of trade 0 Improved options Complete specialization each country ends up with more of goods more ef cient use of resources by specializing in production of the good for which they have the comparative advantage 0 More of both goods More ef cient resource allocation Building relationships with trading partners helps prevent future disagreements that might lead to war 0 Trade with increasing costs Concave production curve there are increasing opportunity costs in the real world and at some point the underlying basis for further specialization and trade disappears so both countries end up producing some of both products 0 We see domesticallyproduced products competing with similar imported products Resources not perfectly substitutable Incomplete specialization 0 Case for free trade Promote ef ciency Promote competition among rms Supply and demand analysis see how equilibrium and quantities of imports and exports are determined 0 Amount that a nation imports or exports of a particular good depends on the difference between the equilibrium world price and the equilibrium domestic price When a country starts to trade domestic price will either rise or fall to the world price level 0 World price 0 Domestic price with no trade price that would prevail in a closed economy that doesn39t engage in trade 0 World price gt domestic price Export surplus suppliers would produce more than demanded by domestic economy then export to receive higher world price Export supply curve 0 World price lt domestic price Import shortage Import supply curve International equilibrium import demandexport supply 0 0 One country s export supply curve intersects the other country s import demand curve After trade equilibrium price would be found in both countries Trade barriers and export subsidies 0 some domestic industries may be hurt by trade and some industries may need to be maintained even if they aren39t cost effective for reasons such as national security or defense Tariffs an excise tax on the dollar value or quantity of an imported good most common trade barrier Revenue tariff applied to a good that39s typically not produced in the domestic country are designed to raise revenue for the domestic government fairly low Protective tariff applied to goods that have a domestic competitor and are designed to make the imported goods cost at least as much as the domestic good high cost Import quota a limit on the amount of a particular good that could be imported in a given amount of time By limiting the supply price is driven up making the imported good more expensive than its domestic competitor Nontariff barrier NTB ie requiring extensive documentation for imported goods restricting the location available to receive the imported goods having unreasonable standards for imported goods etc Voluntary export restriction VER when foreign rms quotvoluntarilyquot agree to limit the amount of their exports to a particular country done under the threat of mandatory barriers not through free will Export subsidies consist of government payments to a domestic producer or export goods and are designed to help that producer by reducing its production costs enables producer to compete more effectively against imported goods Economic impact of tariffs O 0 Direct effects Decline in consumption as the derived goods are now at a higher price than consumers are willing to pay Increase in domestic production as suppliers will be able to receive a higher price for the goods Decline in imports which was the whole point of the tariff Tariff revenue accruing to the domestic government Indirect effects Foreign country supplying the import will sell less causing their economy to decline If they imported any products from the domestic country those will decline too Subsidize inef cient producers which can be a drain on the economy Economic impact of quotas o Decline in consumption 0 Increase in domestic production 0 Decline in imports o Quotas don39t provide for any government revenue but instead transfer it to foreign producers The case for production 0 Military seIfsuf ciency preys on people39s fear of another war and being unable to defend themselves argue the industry related to the military must be protected and maintained domestically o Diversi cation for stability need to have a wellrounded economy that isn39t too heavily invested in any area that could be subject to collapse quotall eggs in one basketquot 0 Infant industry argue they need protection during the infancy stage to help them grow and become strong enough to compete on their own May be needed in a developing nation that is just moving in the world economy don39t prolong the support Other options besides tariffs or quotas may work better 0 Protection against dumping Dumping occurs when a foreign rm deliberater ses goods below their cost in an attempt to drive the domestic industry out of business once domestic industry is gone the foreign rm is then free to raise prices to whatever level they desire can be done with support from foreign government also called quotunfair trade practicequot sanctions can be imposed against the countries or rms involved Increased domestic employment Cheap foreign labor drives wage rates in the US down reducing our standard of living Multilateral trade agreements trend for nations to seek to reduce or eliminate trade barriers as they recognize the fact that trade is a good thing re ect the trend towards increased free trade 0 General agreements on tariffs and trade GA IT aim to provide a forum for muItiIateraI negotiations to reduce trade barriers Equal nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas Has eliminated and reduced tariffs on thousands of products More negotiations adds more countries increasing international trade 0 World Trade Organization WTO Oversees trade agreements and rules on disputes Reduce tariffs quotas and agricultural subsidies that can distort trade 00 Critics may allow nations to circumvent environmental and workerprotection laws may supersede authority of a member nation to protect its own environment and workers by allowing rms to move to countries with less restrictive laws 0 European Union EU Freetrade zone One currency 0 North American Free Trade Agreement NAFTA US Canada Mexico Free trade zone Enhanced standard of living jobs created in US 0 Trade adjustment and offshoring 0 Trade adjustment and assistance act Designed to help workers who have been displaced by international trade 0 Offshoring ofjobs Shifting of work previously done by American workers to workers abroad Can increase the demand for complementary jobs in the US and increase the offshored workers39 income to purchase goods produced in the US


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