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Class Outline

Demand. Demand DeterminantsIncomeTastesPricesPrices of other goodsGiven the tastes of consumers, higher prices will produce a reduction in the consumption of the quantity purchased. Demand. Responsiveness of quantity demanded to changes in priceSlope of the demandsteep slope indicates low re

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Class Outline

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    1. Class Outline Demand and Supply Consumer and Producer Surplus National Market: No Trade International Trade: Free Trade Effect of Trade in Exporting and Importing Countries Reading: Chapter 2 Textbook

    2. Demand Demand Determinants Income Tastes Prices Prices of other goods Given the tastes of consumers, higher prices will produce a reduction in the consumption of the quantity purchased

    3. Demand Responsiveness of quantity demanded to changes in price Slope of the demand steep slope indicates low responsiveness of quantity demanded to a change in price A flatter slope indicates more responsiveness Price elasticity: the percent change in one variable resulting from a 1 percent change in another variable Elasticity: less than -1 high responsiveness (demand is elastic) higher than -1 low responsiveness (demand is inelastic)

    4. Demand

    5. Consumer Surplus

    6. Example Total Value = c + t + u = ? u + t = $2,000 * 40,000=80,000,000 c = (1/2) * ($3,600-2,000) * 40,000=32,000,000 c + t + u = $112,000,000 Total Cost = t + u = $80,000,000 Consumer Surplus = $32,000,000 = c

    7. Supply Supply depends on the marginal cost of producing an extra unit of the good The quantity supplied will increase with the price of the good

    8. Supply Responsiveness of quantity supplied to changes in price Slope of the supply curve steep slope indicates low responsiveness of quantity supplied to a change in price A flatter slope indicates more responsiveness Price elasticity: the percent change in one variable resulting from a 1 percent change in another variable Elasticity: less than 1 supply is inelastic higher than 1 supply is elastic (high responsiveness)

    9. Supply

    10. Producer Surplus

    11. Example Total Cost = z = (1/2)*(1,000-400)*15,000 + 400*15,000 = 10,500,000 Revenue = e + z = 1,000 * 15,000 = = 15,000,000 Producer Surplus = 4,500,000

    12. Market Equilibrium (No Trade)

    13. Free Trade Assume the following The previous situation represents the market in the United States market There is another country called Rest of the World The price in the Rest of the World is lower than in the United States ($700) We assume that prices are stated in the same currency in both countries (just for simplicity) Assume there are no transportation costs

    14. Free Trade Rest of the World market with no trade

    15. Free Trade Effects of Free Trade Producers will engage in arbitrage Buying something in one market and reselling the same thing in another market to profit from the difference in price Imports will reduce the prices in the United States The new market for the Rest of the World will increase prices domestically In the end both countries will have the same price for this product (world price or international price)

    16. Free Trade Effects of Free Trade Demand for imports: Is the excess demand (quantity demanded minus quantity supplied) for motorbikes within the U.S. national market Supply of exports: Is the excess supply (quantity supplied minus quantity demanded) of motorbikes in the Rest of the World market.

    17. Free Trade Equilibrium

    18. Effects of Trade

    19. Effect of Free Trade

    20. Effects of Trade

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