Ch. 2: The Basic Theory Using Demand and Supply
Effects of Trade
Nation o Decrease in price o Decrease in quantity supplied o Increase in quantity demanded Rest of the World o Increase in price o Increase in quantity supplied o Decrease in quantity demanded
Inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
Normal good
a good for which, other things equal, an increase in income leads to an increase in demand
Buying something in one market and reselling it in another market to profit from a price difference is known as
arbitrage
For the importing country in the market for international trade, the shift from no trade to free trade causes the market price to
decrease.
Suppose the export quantity supplied exceeds the import quantity demanded in the market for international trade. In this case the world price would be expected to
decrease.
For the exporting country in the international market for trade, the shift from no trade to free trade causes consumption to ______ and consumer surplus to ______.
decrease; decrease
For the importing country in the market for international trade, the shift from no trade to free trade causes domestic production to ______ and producer surplus to ______.
decrease; decrease
Producer surplus is the increase in the economic well-being of producers who are able to sell a product at a price ______ the lowest price that would have induced them to sell.
higher than
For the exporting country in the international market for trade, the shift from no trade to free trade causes the market price to
increase.
Given a fixed, downward sloping demand curve, if the market price of the product decreases, then the consumer surplus received by consumers will
increase.
If the market demand curve for a good shifts leftward in response to a decrease in consumer income, then the good is described as a ____________ (normal/inferior) good.
normal
The market for international trade (in a specific good) in a two-country world consists of a demand for imports and a supply of exports. The country having the lower pre-trade national price generates the
supply of exports.
The increase in the economic well-being of consumers who are able to buy a product at a market price lower than the highest price they are willing to pay is called consumer __________.
surplus
Consumer surplus will be larger than producer surplus if
the demand curve is steeper (more inelastic) or the supply curve is flatter (more elastic).
Welfare Effects of Free Trade
Effects in the Importing Country o The shift from no trade to free trade lowers the market price o Consumers: Increase in quantity consumed o Producers: Lower profit and production Effects in the Exporting Country o Increase in market price o Producer surplus increases o Consumer consumption and surplus decreases
True or False: If there is no international trade, then equilibrium occurs at the price at which the market clears domestically, with national quantity demanded being less than national quantity supplied.
False
National market with no trade
If there is no international trade, then the equilibrium occurs at the price at which the market clears domestically, with national quantity demanded equal to national quantity supplied. A = no-trade equilibrium c = consumer surplus D = national demand S = national supply h = producer surplus
A change in which one of the following variables will NOT cause the market supply curve to shift?
The price of the product.
True or False: A major use of producer surplus is to measure the impact of a change in the price of a good on the net gain of producers.
True
In a graph of a downward sloping demand curve, the consumer surplus is measured by the area _____ the price line and _____ the demand curve.
above; below
The total cost of producing and selling a product is the entire area _____ the supply curve up to the total quantity supplied.
below
In the absence of international trade, when national markets attain equilibrium,
both consumers and producers benefit.
Arbitrage
buying something in one market and reselling the same thing in another market to profit from a price difference
Elastic demand
demand in which changes in price have large effects on the amount demanded
Inelastic demand
demand in which changes in price have little or no effect on the amount demanded
When displayed graphically, with quantity demanded measured horizontally and price measured vertically, a market demand curve will slope
downward.
One-dollar, one-vote metric
each dollar of gain or loss is valued equally regardless of who experiences it
If the price elasticity of supply is greater than 1.0, then the supply is said to be
elastic.
If the quantity demanded is substantially responsive to a price change, then demand is said to be
elastic.
In assessing the net national welfare effect of moving from no trade to free trade, economists typically adopt the value judgment that each dollar of gain or loss is valued _____ who experiences it.
equally, regardless of
In general, if one demand curve is steeper than another and both are plotted with the same axes, then the steeper demand curve is the _____ elastic of the two.
less
Suppose the import quantity demanded exceeds the export quantity supplied in the market for international trade. In this case, the world price must be too _____ for a free-trade equilibrium.
low
The market for international trade (for a specific good) in a two-country world consists of a demand for imports and a supply of exports. The demand for imports is generated from the excess demand of the country having the ______ pre-trade national price.
lower
A competitive firm will supply another unit of a good if its price exceeds the _____ cost of producing it.
marginal
Adding up the quantities supplied at each price by all producers of a given product yields the _____ supply curve, which is presumed to be _____.
market; upward sloping
The separate gains derived by the importing and exporting countries from the opening of trade
may or may not be equal.
When the price of a product changes, there is a ______ the given supply curve.
movement along
Why do countries trade?
o Demand and supply conditions differ between countries, so prices differ between countries if there is no international trade. o Trade begins as someone conducts arbitrage to earn profits from the price difference between previously separated markets. o A product will be exported from countries where its price was lower without trade to countries where its price was higher.
Which country gains from trade?
o If we use the on-dollar, one-vote metric, then both do. o Each country's net national gains from trade are proportional to the change in its price that occurs in the shift from now trade to free trade. o The country whose prices are disrupted more by trade gains more.
Demand curve
o Steep slope = low responsiveness of quantity to a change in price (less elastic) o Flatter slope = more responsiveness to a change in price (more elastic)
Which of the following are determinants of how much a consumer demands of a product?
o The consumer's income o The consumer's tastes and preferences o The prices of other products o The price of the product
Within each country, who are the gainers and losers from opening trade?
o The gainers are the consumers of imported products and the producers of exportable products. o Those who lose are the producers of import-competing products and the consumers are exportable products.
How does trade affect production and consumption in each country?
o The move from no trade to a free-trade equilibrium changes the product price from its no-trade value to the free-trade equilibrium international price or world price. o The price change in each country results in changes in quantities consumed and produced. o In the country importing the product, trade raises the quantity consumed and lowers the quantity produced. o In the country exporting country, trade raises the quantity produced and lower the quantity consumed of the product.
Producer surplus
o the difference between the current market price and the cost of production for the firm o measures the net gain or producers who are able to sell the good at a price higher than the lowest price that would have drawn out their supply
The supply curve and the marginal cost curve are
one and the same.
The price elasticity of supply is the ______ increase in quantity supplied resulting from a 1 percent increase in market price.
percent
Price elasticity of demand
percent change in quantity demanded divided by percent change in price
Using the "one-dollar, one-vote" value judgment, it can be asserted that the shift from no trade to free trade yields a ______ net national welfare effect for the exporting country.
positive
The separate benefits that consumers and producers obtain when the national market clears are
positive, but not necessarily equal.
Consumer demand
preferences for goods and services influenced by tastes, the price of the product, the prices of other products, and income
The gains between the participating countries from opening trade are divided in direct proportion to the _____ changes that trade brings to the individual countries.
price
The price elasticity of demand is the percent change in _____ resulting from a 1 percent increase in _____.
quantity demanded; price
Suppose the price of a good is $800 in market A but only $600 in market B. On the assumption that transportation and transaction costs are negligible, an arbitrager would _____ in market A and _____ in market B.
sell; buy
Consider the market for music concerts. When changes occur in consumer tastes, consumer incomes, or the prices of other forms of entertainment, the market demand curve for concerts will
shift.
A low buyer responsiveness to a change in price is indicated by a _____ demand curve.
steep
The basic theory of trade usually results from the interaction of competitive demand and ___________.
supply
Consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
Net national gains from trade
the difference between what one group gains and what the other group loses
Demand for imports
the excess demand (quantity demanded minus quantity supplied) of a good within the national market
Supply of exports
the excess supply (quantity supplied minus quantity demanded) of a good in the rest-of-the world market
International price or world price
the free-trade equilibrium price
Elasticity
the percentage change in quantity demanded or supplied as a result of a one percent change in price
Price elasticity of supply
the percentage change in quantity supplied divided by the percentage change in price
The two major influences determining the quantity of a product a firm chooses to make available for sale are
the product's price and its production/selling costs.
Opportunity cost
the value of other goods and services that are not produced because resources are instead used to produce this product