Tarriffs and quotas with perfect competition Flashcards
trade policy
any government action designed to influence the quantity of imports or exports
import tarrifs
taxes on imported goods
import quotas
direct limitations on the quantity of a goof that can be imported
export subsidies
government payments rewarding firms that export some of their product
how do trade policies affect economic welfare?
they change the prices that people pay and the prices firms receive for goods
how is a supply deficit fixed?
by allowing for imports
Import Demand
quantity of imports demanded by a country as a function of the world price of the product
Export Demand
quantity of exports supplied by a country as a function of the world price of the product
how is an import demand curve constructed?
You plot the difference in supply and demand for a product at every price point
what is the intercept of the import demand curve?
the autarky price in the importing country
what is the intercept of the export demand curve?
the autarky price in the exporting country
free trade
Frictionless trade. No tarrifs, no quotas
how does the introduction of trade affect the exporting country?
increases price of the good. Helps foreign producers and hurts foreign consumers
how does the introduction of trade affect the importing country?
decreases price of the good. Helps home consumers and hurts home producers
Consumer Surplus
the difference between the highest price someone is willing to pay for a good and the price that all consumers actually pay for it
when consumer surplus increases, what do the 2 shapes that make up the increase represent?
The rectangle represents people who were already willing to pay at a higher price, and the triangle represents people who were not willing to pay at a higher price and now are
producer surplus
the difference between the price a firm gets from its prouct and the marginal cost of production
what represents the the lowest price a producer is willing to sell their product for?
the marginal cost of production
when producer surplus decreases, what do the 2 shapes that make up the decrease represent?
the rectangle represents the loss to producers who continue to sell at a reduced price, and the triangle represents the loss to producers who left the markets because of a lower price
Net game from trade for the world
the difference between the autarky price in the 2 countries multiplied by the quantity of trade
what do import tariffs do to small countries?
they reduce social welfare
what do import tariffs do to small countries?
they increase social welfare
how does p* change for a small country?
it doesn’t, its fixed
what is the shape of the export supply curve if it’s dealing with a small importing country?
completely flat, perfectly elastic
where does net gain from trade go?
to the importing country
what does distortion caused by tariffs cause itself?
-deadweight loss
-artificially raises the price
-that causes firms to produce too much of the imported good
-consumers buy too little
what does the triangle under the demand curve in the home country market diagram represent?
consumption loss or consumption distortion
what does the triangle under the supply curve in the home country market diagram represent?
production loss/distortion, efficiency loss
what do production loss and consumption loss make when combined?
dead weight loss
what happens relating to quantity and world price when a large country implements a tarrif?
the quantity is limited and then the world price depresses
coolio
fact: price does not increase by the full amount of the tariff in the importing country
What is the definition of a small country?
A country that cannot in any way influence the price of a product in the rest of the world. They are a price taker.
what does a tariff do for consumers?
it reduces consumer surplus
what does a tariff do for producers?
it increases producer surplus
what does a tariff do for government?
it gives it revenue that can then be distributed
terms-of-trade-gain
stolen gain from trade
terms-of-trade-gain equation
difference between free trade price and world price, multiplied by q of trade
what do tariffs force exporters to do?
cut their price
what does an exporting country that experiences a terms-of-trade-loss also experience?
dead weight loss
what does a lower price caused by a tariff result in?
producing too little and consuming too much of a good which a country has comparative advantage in
how do you calculate total loss to exporters?
DWL + terms-of-traide-gain
Optimal Tariff
a tariff that maximizes a country’s social welfare
optimal tariff
1/elasticity of export supply
elasticity of export supply
% increase in quantity of exported when the price increases by 1%
why is a quota license valuable
because the holder can buy for low at the world market and sell high domestically
