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The Gains from International Trade A Market View

The Gains from International Trade A Market View. Assumed as Fixed All those things we assume as fixed when we talk about the market demand for a product. All those things we assume as fixed when we talk about the market supply for a product. Domestic Sugar Market

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The Gains from International Trade A Market View

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  1. The Gains from International Trade A Market View

  2. Assumed as Fixed • All those things we assume as fixed when we talk about the market demand for a product. • All those things we assume as fixed when we talk about the market supply for a product.

  3. Domestic Sugar Market In U.S. Without Import Option S Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  4. Domestic Sugar Market In U.S. Without Import Option Assume that the supply curve reflects marginal costs …. Put another way, its also the marginal cost curve!!! (See handout … Primer on Allocative Efficiency) S Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  5. Domestic Sugar Market In U.S. Without Import Option S = MC Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  6. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option Remember the demand curve reflects marginal benefits …. Put another way, its also the marginal benefit curve!!! (See handout … Primer on Allocative Efficiency) S = MC Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  7. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC Price per pound .35 .30 .25 .225 .15 D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  8. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option At equilibrium, we have allocative efficiency. MC = MB. Every elected million-pound unit of sugar is produced. We’ve produced the “correct” amount of sugar. (See Primer on Allocative Efficiency.) S = MC Price per pound .35 .30 .25 .225 .15 D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  9. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC Maximum dollar votes someone will cast for 20th millionth pound = $.35. Price per pound .35 .30 .25 .225 .15 D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  10. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC Maximum dollar votes someone will cast for 20th millionth pound = $.35. Price per pound .35 .30 .25 .225 .15 The dollar votes that would be cast for next best use of the resources required to produce the 20th millionth pound is $.10. D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  11. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC The 20th pound of sugar is “elected” (by a vote of $.35/pound to $.10/pound) and produced (produced apparently since the equilibrium quantity is 45 units). Allocative efficiency Maximun dollar votes someone will cast per pound for 20th unit of 1 million pounds = $.35. Price per pound .35 .30 .25 .225 .15 The dollar votes that would be cast for next best use of the resources required to produce each pound in the 20th unit of 1 million pounds is $.10. D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  12. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC The 30th pound of sugar is also “elected” (by a vote of $.30/pound to $.15/pound) and produced (produced apparently since the equilibrium quantity is 45 units). Allocative efficiency Maximun dollar votes someone will cast per pound for 20th unit of 1 million pounds = $.35. Price per pound .35 .30 .25 .225 .15 The dollar votes that would be cast for next best use of the resources required to produce each pound in the 20th unit of 1 million pounds is $.10. D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  13. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC Every pound, of sugar from 1 to 44,999,999 is also “elected” and produced (produced apparently since the equilibrium quantity is 45 units). (Note: there is a tie vote on the 45th Million … MC = MB) Allocative Efficiency!! Maximun dollar votes someone will cast per pound for 20th unit of 1 million pounds = $.35. Price per pound .35 .30 .25 .225 .15 The dollar votes that would be cast for next best use of the resources required to produce each pound in the 20th unit of 1 million pounds is $.10. D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  14. Domestic Sugar Market In U.S. Without Import Option Domestic Sugar Market In U.S. Without Import Option S = MC At equilibrium, MC = MB!! Allocative Efficiency!! Maximun dollar votes someone will cast per pound for 20th unit of 1 million pounds = $.35. Price per pound .35 .30 .25 .225 .15 The dollar votes that would be cast for next best use of the resources required to produce each pound in the 20th unit of 1 million pounds is $.10. D = MB .10 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  15. Domestic Sugar Market In U.S. Without Import Option The Book’s Version of Allocative Efficiency (Appendix in Primer on Allocative Efficiency) S Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  16. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  17. Domestic Sugar Market In U.S. Without Import Option S Price per pound .35 .30 $.125 $.075 .25 .225 .15 .10 D 40 50 60 60 70 70 20 20 30 30 45 Sugar (Millions of Pounds per month) Sugar (Millions of Pounds per month)

  18. Domestic Sugar Market In U.S. Without Import Option Somebody would pay a maximum of $.35 for the 20 millionth pound, but they only have to pay $.225 … consumer surplus of $.125 per pound. S Price per pound .35 .30 $.125 $.075 .25 .225 Somebody would pay a maximum of $.30 for the 30 millionth pound, but they only have to pay $.225 … consumer surplus of $.075 per pound. .15 .10 D 20 30

  19. Domestic Sugar Market In U.S. Without Import Option S Imagine all of the “blue bars” that represent consumer surplus for every single unit. Jam them together and we have a solid blue area … the total consumer surplus that consumers can enjoy. Price per pound .35 .30 $.125 $.075 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  20. Domestic Sugar Market In U.S. Without Import Option S Price per pound .35 .30 Consumer surplus $.125 $.075 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  21. Domestic Sugar Market In U.S. Without Import Option On the 20 millionth pound, the producer takes in $.225 while incurring an extra cost of only $.10 …. This is a $.125 producer surplus for that pound. This pound improves his situation by $.125. On the 30 millionth pound, there is a $.075 producer surplus … This pound leaves the producer $.075 better off. We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 .25 .225 $.075 $.125 .15 .10 D 20 30

  22. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Imagine all of the “red bars” that represent producer surplus for every single unit. Jam them together and we have a solid red area … the total producer surplus that producers can enjoy. Price per pound .35 .30 .25 .225 $.075 $.125 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  23. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 .25 .225 $.075 $.125 Producer’s Surplus .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  24. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 Consumer surplus .25 .225 $.075 $.125 Producer’s Surplus .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  25. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 We have maximized the combined blue/red areas by going to equilibrium …. This is allocative efficiency!!! .30 Consumer surplus .25 .225 $.075 $.125 Producer’s Surplus .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  26. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound We have maximized the combined blue/red areas by going to equilibrium …. This is allocative efficiency!!! The only way to make one of the colored areas larger would be to make the other smaller. For example .35 .30 Consumer surplus .25 .225 $.075 $.125 Producer’s Surplus .15 .10 D 40 20 30 45

  27. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound Suppose the price is $.35 instead of $.225. Consumers will only buy 20 million units. See what that does to the next slide!!!!!!!! .35 .30 Consumer surplus .25 .225 $.075 $.125 Producer’s Surplus .15 .10 D 40 50 20 30 45

  28. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 The red area now cuts into the blue because of higher price, but the combined areas are smaller. .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45

  29. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Notice, more to the point … we are not producing every single elected unit. Every unit that consumers would like to elect is not available. Price per pound .35 .30 .25 .225 .15 .10 D 40 20 30 45

  30. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound What if, instead the price is $.10. That means producers will only offer 20 units. Look what happens on the next slide. .35 .30 .25 .225 .15 .10 D 40 20 30 45 Sugar (Millions of Pounds per month)

  31. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 The blue area cuts into the red because the price is so much lower, but the combined areas are smaller. .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  32. Domestic Sugar Market In U.S. Without Import Option Notice again, we are not producing every single elected unit. Consumers are enjoying great surpluses on the units they are buying, but they would “elect” more units. We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45

  33. Domestic Sugar Market In U.S. Without Import Option So, we maximize the 2 areas by producing every elected unit, which means going to equilibrium. We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  34. We are performing ideally at equilibrium assuming that there are no opportunities for international trade. Now let’s create a trade opportunity.

  35. We are performing ideally at equilibrium assuming that there are no opportunities for international trade. Now let’s create a trade opportunity. Suppose that sugar is readily available on world markets for $.10 a pound. Look what happens to our market.

  36. Domestic Sugar Market In U.S. Without Import Option S We go from this … Price per pound .35 .30 .25 .225 .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  37. S To this!!!!!!!! Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  38. S As far as U.S. buyers are concerned, supply is now the Purple curve. Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  39. S New equilibrium is at a Price of $.10 and a quantity Of 70 (Qs = Qd at 70) Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  40. U.S. producers will produce only 20 million pounds while we import the other 50 million. (Note: in U.S., quantity supplied would be 20 at a price of $.10, trade or no trade.) Altogether, consumers buy 70 units. S Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  41. S Assuming that the combined U.S. and world supply still reflect marginal costs, consumers are now electing 70 units of sugar rather the 45. Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  42. Consumers are electing more units and getting far more of these units at a price that is lower than what they are willing to pay. Consumers are better off. They are not being forced to buy 70 as opposed to 45 … they are doing it because it increases their well being (as they see it). S Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  43. Consumers are electing 70 units because the production of these 70 units is the most satisfying use of the resources required (resources that are both here and abroad). S Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  44. Since consumers will elect to buy 70 units of their own free will given the opportunities for international trade, we are honoring their preferences (and achieving allocative efficiency) only if they are allowed to take advantage of international trade and purchase the 70 units. S Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  45. Consumers, of course, will only be aware of the international trade because they are paying lower sugar prices. S Price per pound .35 .30 .25 .225 .15 S .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  46. Here is another way to look at it (this is more in line with your book’s presentation).

  47. Domestic Sugar Market In U.S. Without Import Option We have maximized consumer and producer surplus!!!!!!!! S We go from this: Price per pound .35 .30 Consumer surplus .25 .225 $.075 $.125 Producer’s Surplus .15 .10 D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  48. We have maximized consumer and producer surplus!!!!!!!! S To this. Price per pound .35 .30 Consumer surplus .25 .225 .15 S .10 Producer’s Surplus D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  49. We have maximized consumer and producer surplus!!!!!!!! S We have expanded the combined consumer/producer surplus!!!!! Price per pound .35 .30 Consumer surplus .25 .225 .15 S .10 Producer’s Surplus D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

  50. Notice the patterned blue area. This is extra consumer surplus on the 45 units consumers would have bought even without trade. We have maximized consumer and producer surplus!!!!!!!! S Price per pound .35 .30 Consumer surplus .25 .225 .15 S .10 Producer’s Surplus D 40 50 60 70 20 30 45 Sugar (Millions of Pounds per month)

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