AEM-ECON%202300%20Lecture%206%20Spring%202011

AEM-ECON%202300%20Lecture%206%20Spring%202011 - Lecture 6...

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1 Lecture 6 Professor David Lee AEM/ ECON 2300 International Trade Equilibrium S B D B Q A Q T Q B P P P S A D A Exporting country International market Importing country P A ES A ED B P B Q A 1 Q A 2 Q B 1 Q B 2 P* Q* At (P*, Q*): Q* = Q A 2 – Q A 1 = Q B 2 – Q B 1
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2 Lecture 6 Professor David Lee AEM/ ECON 2300 Consumer and Producer Surplus S D Q* C P* B Q 0 P A Consumers: Willingness to pay: Actually pay: Consumer surplus: BAQ*0 P*AQ*0 BAP* P*AQ*0 CAQ*0 P*AC “Consumer surplus”: Difference between what consumers are willing to pay and what they actually pay for a good (Q*). Producers: Actually received: Willingness to accept: Producer surplus: “Producer surplus”: Difference between what producers are willing to accept and the price they actually receive at a given quantity supplied (Q*).
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3 Lecture 6 Professor David Lee “Gains from trade” Exporting country International market Importing country S B D B Q A Q T Q B P P P S A D A ES A ED B Consumers Producers Country Consumers Producers Country -a +(a+b) +b +(c+d) -c +d b+d d b a b c d Q* P* P A P B Global welfare change AEM/ECON 2300
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4 Lecture 6 Professor David Lee P Q T ES A For “Large Country” Exporter and Importer → Net Welfare Changes = (b + d) ED B P* International market Importer gains* Exporter gains* Price rises (from autarky) when trade is allowed Price falls (from autarky) when trade is allowed AEM/ECON 2300 d b *compared to autarky
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5 Lecture 6 Professor David Lee But…elasticity of supply can change – what happens? P Q S S’ More inelastic S P Q S S’ More elastic S AEM/ECON 2300 Less responsive S to a change in price More responsive S to a change in price
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6 Lecture 6 Professor David Lee P Q T ES A Change in domestic supply affects export supply: • for example, a more elastic excess supply curve ED B P* International market ES’ A AEM/ECON 2300
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AEM-ECON%202300%20Lecture%206%20Spring%202011 - Lecture 6...

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