Test 2 Study Guide- Trade Graphs
Test 2 Study Guide- Trade Graphs PSC 204- Dr. Chyzh
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Date Created: 03/21/15
Test 2 Study Guide Trade Graphs Absolute and Comparative Advantage 0 Absolute advantage producing a good more efficiently than any other country 0 Absolute advantage belongs to the producer woverall lowest cost per product value I Look at numbers given ex the 10 15 15 30 values in the chart below 0 Comparative advantage producing a good at a lower opportunity cost than another country 0 Comparative advantage belongs to producer woverall lowest opportunity cost value I Find the value of 1 X Y see chart below 0 All countries have a comparative advantage in something but not all countries have an absolute advantage in something Cloth labor hoursbolt Wine labor hourbarrel England 15 30 Opportunity Cost for cloth is Opportunity Cost for wine is 1 bolt12 barrel 1 barrel 2 bolts Portugal 10 15 Opportunity Cost for cloth is Opportunity Cost for wine is 1 bolt 23 barrel 1 barrel 15 bolts o If England and Portugal do not trade 0 England I It takes 15 labor hours to produce one bolt of cloth I It take 30 labor hours to produce one barrel of wine 0 Portugal I It takes 10 labor hours to produce one bolt of cloth I It takes 15 labor hours to produce one barrel of wine 0 thus the absolute advantage for cloth goes to Portugal The absolute advantage for wine goes to Portugal I Why Because in both instances Portugal s cost of production is less 10 is less than 15 and 15 is less than 30 0 Analyzing Opportunity Costs 0 England I Cloth 1 bolt to 12 barrel I Wine 1 barrel to 2 bolts 0 Portugal I Cloth 1 bolt to 23 barrel I Wine 1 barrel to 15 bolts 0 thus the comparative advantage for cloth goes to England The comparative advantage for wine goes to Portugal I Why To make one bolt costs England 12 barrel while it costs Portugal 23 barrel 12 lt 23 To make one barrel costs England 2 bolts while it costs Portugal 15 bolts 15lt2 Supply and Demand o 0 39s 39 390 3 00 39 an a o i at l 39 03910 x 43 Supply is the green line Demand is the red line Any change to the supply or demand line is the purple line Price yaxis Quantity xaxis Moving the supply line to the right supply increases to the left supply decreases Moving the demand line to the right demand increases to the left demand decreases Moving upward on the green supply line supply increases downward supply decrease Moving rightward on the red demand line demand increases leftward demand decreases Result of changes in the supplydemand line and commodity s price 0 O O 0 Increase supply gt price decrease and quantity increases Decrease supply gt price increases and quantity decrease Increase demand gt price increase and quantity increases Decrease demand gt price decrease and quantity decreases Purine ESE re main Eu ppin Price Eeiiing Equilibrium Price Eeiiing 52E Eonage of Suplg J 2 m It maintitty of Goods 0 This graph shows the effect on price and quantity with a change in the equilibrium 0 At equilibrium the price is 5 and the quality supplied by the producer is 5 units I if the price goes down to 2 the gray equilibrium line would hit the blue supply line at 2 and hit the green demand line at 8 Since the price went down this hurts the supplier less profit per unit but benefits the consumer pay less per unit The quot2 units represents the amount of the product the supplier is willing to produce The quot8 units represents how much of the product the consumer demands The consumer s demand outpaces producers supply which is why you have a supply shortage I If the price goes up to 8 the gray equilibrium line would hit the blue supply line at 8 and hit the green demand line at 2 Since the price went up this helps the supplier more profit per unit but hurts the consumer pay more per unit The quot8 units represents the amount of the product the supplier is willing to produce price price produce more get more profit The quot2 units represents how much of the product the consumer demands The suppliers production out paces the consumers demand so there is a surplus Supply and Demand wAutarkv NO trade l ru39c Sum I39tiillllhrllllll pru39c lit2111126 l v J 4 L l l 1 1 Y 1 lHl llll I I U U U I Y lumlilmmn qunnlllj 0 Buyer surplus quotConsumer Surplus monetary gains by the consumers 0 Full range of savings between what a consumer is expected to pay and what heshe actually paid I The difference bwn what you value the item to be priced at and the actual market value price you pay for it o it is the region ABOVE the equilibrium line in the triangle formed by the yaxis the supply line and the demand line 0 the size of the Consumer Surplus can change if there is a change in supply or demand 0 Seller surplus quotProducer Surplus monetary gains by the producers 0 Full range of prices of what a producer expects to sell an item for I What a producer expects to sell the item for and what heshe actually sells the item for o it is the region BELOW the equilibrium line in the triangle formed by the yaxis the supply line and the demand line 0 the size of the Producer Surplus can change if there is a change in supply or demand Supply and Demand wtrade L15 quot34 Ch 4 o Pretrade o Equilibrium is at Po and Q0 0 The triangle formed by A and B is the consumer surplus o The triangle formed by G C and D is the producer surplus o Wtrade o Allowing trade to occur lowers the price of the commodity so the equilibrium line moves down in price to Pw The new equilibrium creates two theoretical quantities Q0 the leftmost one represents the quantity the producer will supply price is less less profit supply less Qt the rightmost one represents the quantity the consumers demand price is less pay less demand more Because this trade action benefits the consumer price is lower the consumer surplus region expands while the producer surplus region shrinks I The new consumer surplus region is A B C D E and F I The new producer surplus region is G o This graph demonstrates the winnerloser consequence of trade 0 The winner is the consumer gt price is less so spend less money 0 The loser is the producer gt price is less so less profit made Tariffs o Tariffs is a protectionist policy 0 Tariffs produce dead weight loss DWL inefficient production of an item 0 2 sources of dead weight loss I Production of inefficient goods I Consumption of inefficient goods 0 Dead Weight Loss result of protectionist policies quotrepresents the efficiency losses to society 0 Lose in efficient production by the producer due to trade protectionism tariffs I Tariffs cause the price of a commodity to increase This causes consumers to demand less of the commodity because they do not want to pay more for it This decline in demand means that the producer will produce less making him less efficient than what he could be if the tariff wasn t in place II A D Sc an E r A I SM P I TRIM w G F i c B 3 I A l I 0 o o 2 Q3 0 39 Quantity 0 Original equilibrium wo trade Pd and Q0 0 Allowing trade moves the price down to Pw and produces to theoretical quantities of Q2 how much the producer will supply and Q1 how much the consumer will demand 0 Consumer surplus region expands and producer surplus region shrinks 0 Since the price is lower the producers are hurt financially To help them the government institutes a tariff on all imports of foreign products that are similar to the products the producer supplies 0 Adding a tariff raise the commodity s price to Pd1 The new theoretical quantities are Q4 how much the producer will supply and Q3 how much the consumer will demand Because the price is higher the supplier can make more of a profit so heshe will increase the amount supplied But because the price is higher the consumer will demand less of that product 0 Consumer surplus region shrinks and the producer surplus region expands I But compared to the original equilibrium the consumer surplus is greater than its original size and the producer surplus is smaller than its original size 0 Dead Weight Loss triangles EFG and ABC o Triangle ABC represents the quotconsumption of inefficient goods By adding the tariff consumer s demand moves from point B to point A This is a backward move on the demand curve and is thus a loss 0 Triangle EFG represents the quotproduction of inefficient goods By adding the tariff the producer s supply moves from point G to E But the consumer is less likely to buy the good at the higher price so less products are bought nonsold goods loss 0 Tax Revenue by the government rectangle formed by ACFE
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