ECON 101 Lecture Notes - Lecture 16: Autarky, Economic Equilibrium, Economic Surplus

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25 Mar 2015

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ECON 101 Full Course Notes

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Econ 101 - lecture #16 - international trade with importing and exporting countries. Before analyzing the benefits and costs of international trade, we first have to imagine a world where trade is not implemented. A country that does not trade is called an autarky. The domestic price adjusts to balance domestic demand and domestic supply. The sum of consumer surplus and producer surplus equals total surplus - everything is efficient. Pa is equilibrium price under autarky; qa is equilibrium quantity under autarky. Possibility about international trade raises a few important questions. When considering international trade, we have to consider global market along with domestic market. Global supply is the sum of supply functions of all trading countries. Global demand is the sum of demand functions of all trading countries. Pw is the equilibrium price in the global market; qw is the equilibrium quantity in the global market. Figure 1 offers a realistic depiction of the global marginal cost function (supply)

Related Questions

Trade Policy.

The demand for cars in Home is q = 30 â P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 10 â P and the supply of cars in Foreign is q = P.

a) Calculate the autarky equilibrium price and quantity in each country.

b) Who is the importer of cars and who is the exporter?

c) Write the import demand for Home and the export supply for Foreign.

d) Find the equilibrium world price under free trade. What is the amount of cars traded between the two countries?

e) Suppose the country that is the importer imposes a tariff of $2 per unit on car imports. Find the new equilibrium world price under the tariff. What is the amount of cars traded between the two countries now? Show this in a graph with the import demand for Home and the export supply for Foreign.

f) Look at figure 1 for Home and fill in the table below (with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

g) Look at figure 2 for Foreign and fill in the table below ((with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

h) Does Home experience a terms of trade gain or loss as a result of the tariff? Does Foreign experience a terms of trade gain or loss as a result of the tariff?

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Purpose of Assignment

In Week 2, students will employ the supply and demand model to develop consumer surplus and producer surplus as a measure of welfare and market efficiency. Students learn about welfare economics--the study of how the allocation of resources affects economic well-being--and will discover that under most circumstances, the equilibrium price and quantity is also the one that maximizes welfare. Students will review different sources of externalities and a variety of potential cures and will see that while markets are usually a good way to organize economic activity, governments can sometimes improve market outcomes. Students will see how the U.S. government raises and spends money and the difficulty of making a tax system both efficient and equitable.

Assignment Steps

Scenario: Imagine you have been assigned the responsibility of preparing a paper for the governor's next economic conference.

Prepare a 1,050-word paper addressing the following:

Explain why equilibrium of supply and demand is desirable.

Explain the following concepts using the concept of consumer and producer surplus:

Efficiency of markets

Costs of taxation

Benefits of international trade

Discuss how externalities may prevent market equilibrium and the various government policies used to remedy the inefficiencies in markets caused by externalities.

Analyze the difference between the efficiency of a tax system and the equity of a tax system as it refers to the costs imposed on taxpayers using the benefits principles.

Cite a minimum of three peer-reviewed sources, not including your textbook.

Format consistent with APA guidelines.

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ECON 101 Lecture Notes - Lecture 16: Autarky, Economic Equilibrium, Economic Surplus

ECON 101 Full Course Notes

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