ch7 (pp153- 64)- f10

Introduction to MicroeconomicsAP/ECON1000 3.0

Fall 2010

Section A: TR; 8:30 – 10:00 amSection C: M; 2:30 – 4:30 pm

W; 2:30 – 3:30 pm

Professor: Art Noordeh, PhD

Web site:www.noordeh.pageout.net

http://www.noordeh.pageout.net/

Teaching Assistant1. Nikolas Goyert-Stephens

Office: 1131 VHHours: MTR; 9 – 11 amEmail: [email protected]

2. Mun ThamOffice: 1029 VHHours: W; 2:30 – 4:30 / F; 10:30 – 2:30 pmEmail: [email protected]

3. Stacy ShiOffice: 1029 VHHours: R; 1 – 4 pm / F; 10:30 – 1:30 pm (new)Email: [email protected]

4. Murat NizamOffice: 1131 VHHours: TR; 11:30 – 2:30 pmEmail: [email protected]

5. Kayenat KabirOffice: 1083 VHHours: MW; 2:30 – 5:30 pmEmail: [email protected]

mailto:[email protected]





Course EvaluationSection A

M1 - Midterm 1(40%): Tuesday October 19th – in classM2 - Midterm 2(40%): Tuesday November 23rd – in

class

F - Final Exam (60%): Final examination period – TBA

The final course mark (FM) will be determined according to the following formula:

FM = MAX [(0.4M1+0.6F),(0.4M2+0.6F)]

Final course grades may be adjusted to conform to Program or Faculty grades distribution profiles.

No Make up for the Midterm Exam

Course EvaluationSection C

M1 - Midterm 1(40%): Monday October 18th – in classM2 - Midterm 2(40%): Monday November 22nd – in class

F - Final Exam (60%): Final examination period – TBA

The final course mark (FM) will be determined according to the following formula:

FM = MAX [(0.4M1+0.6F),(0.4M2+0.6F)]

Final course grades may be adjusted to conform to Program or Faculty grades distribution profiles.

No Make up for Midterm Exam(s)

Important Dates to Remember

Nov.12: Last date to drop the course without receiving a grade

Dec.10: Last Day of Classes

Dec.12 – 23: Final Examination Period

Reading/Homework for the weeks of

Oct. 17 & 24

• Reading: Text – Chs. 7(pp153 – 164), 8(pp 181- 186) & 9

• Practice Exercises:Practice Exercises: All review Quizzes & Odd- All review Quizzes & Odd-numbered problemsnumbered problems

• Additional home work (recommended):Study Guide: Chs. 7(153 – 164), 8(pp 181- 186) & 9, Key Concepts & odd-numbered Multiple Choice Key Concepts & odd-numbered Multiple Choice questionsquestions

Myeconlab: Myeconlab: practice questions and sample quizzes.practice questions and sample quizzes.

Chapter 7Global Markets in Action

(PP 153 – 164)

Objective

Learn how markets work with international trade

Identify the gains from the International Trade

Who benefits and who loses from International Trade

What are barriers to international Trade

Effects of the barriers to Trade

–Because we trade with people in other countries, the goods and services that we can buy and consume are not limited by what we can produce.

–Imports are the good and services that we buy from people in other countries.

–Exports are the goods and services we sell to people in other countries.

How Global Markets Work

•International Trade Today–Global trade today is enormous.–In 2008, global exports and imports were $35 trillion, which is more than half the value of global production.–In 2008, total Canadian exports were $535 billion, which is about 34 percent of the value of Canadian production.–In 2008, total Canadian imports were $503 billion, which is about 32 percent of the value of Canadian production.–Services are 13 percent of total Canadian exports and 18 percent of total Canadian imports.


•What Drives International Trade?–The fundamental force that generates trade between nations is comparative advantage. –The basis for comparative trade is divergent opportunity costs between countries. –National comparative advantage is the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation.


–The opportunity cost of producing a T-shirt is lower in China than in Canada, so China has a comparative advantage in producing T-shirts.

–The opportunity cost of producing a regional jet is lower in Canada than in China, so Canada has a comparative advantage in producing regional jets.

–Both countries can reap gains from trade by specializing in the production of the good at which they have a comparative advantage and then trading.

–Both countries are better off.



Canadian demand and Canadian supply with no international trade.

The price of a T-shirt at $8.

Canadian firms produce 4 million T-shirts a year and Canadian consumers buy 4 million T-shirts a year.


With international trade, the price of a T-shirt in Canada falls to $5.

At $5 a T-shirt, Canadian garment makers produce 2 million T-shirts a year.

At $5 a T-shirt, Canadians buy 6 million T-shirts a year.

Canada imports 4 million T-shirts a year.


Why Canada Exports Regional Jets

Canadian demand and Canadian supply with no international trade.

The price of a jet at $100 million.

Bombardier produces 40 regional jets a year and Canadian airlines buy 40 a year.


With international trade, the price of a jet in Canada rises to $150 million.

At $150 million, Canadian airlines buy 20 jets a year.

At $150 million, Bombardier produces 70 regional jets a year.

Canada exports 50 regional jets a year.

–International trade lowers the price of an imported good and raises the price of an exported good.

–Buyers of imported goods benefit from lower prices and sellers of exported goods benefit from higher prices.

–But some people complain about international competition: not everyone gains.

–Who wins and who loses from free international trade?

Winners, Losers, and the NetGain from Trade


Gains and Losses from Imports

The market in Canada with no international trade.

Total surplus from T-shirts is the sum of the consumer surplus and the producer surplus.

The market in Canada with international trade.

The world price is $5 a T-shirt.

Consumer surplus expands from area A to the area A + B + D.

Producer surplus shrinks to the area C.



The area B is transferred from producers to consumers.

Area D is an increase in total surplus.

Area D is the net gain from imports.


Gains and Losses from Exports

The market in Canada with no international trade.

Total surplus from regional jets is the sum of the consumer surplus and the producer surplus.

The market in Canada with international trade.

The world price of a jet is $150 million.

Consumer surplus shrinks to the area A.

Producer surplus expands to the area C + B + D.



The area B is transferred from consumers to producers.

Area D is an increase in total surplus.

Area D is the net gain from exports.

– Governments restrict international trade to protect domestic producers from competition.

– Governments use four sets of tools:TariffsImport quotasOther import barriersExport subsidies

International Trade Restrictions

• Tariffs– A tariff is a tax on a good that is imposed by the

importing country when an imported good crosses its international boundary.

– For example, the government of India imposes a 100 percent tariff on wine imported from Canada.

– So when an Indian wine merchant imports a $10 bottle of Ontario wine, he pays the Indian government $10 import duty.


–The Effects of a Tariff–With free international trade, the world price of a T-

shirt is $5 and Canada imports 4 million T-shirts a year.

–Imagine that Canada imposes a tariff of $2 on each T-shirt imported.

–The price of a T-shirt in Canada rises by $2. –The following diagram shows the effect of the tariff on

the market for T-shirts in Canada.



the market before the government imposes the tariff.

The world price of a T-shirt is $5.With free international trade, Canada imports4 million T-shirts a year.


The effect of a tariff on imports.

The tariff of $2 raises the price in Canada to $7.

Canadian imports decrease to 1 million a year.

Canadian government collects the tax revenue of $2 million a year.

– Winners, Losers, and Social Loss from a Tariff

– When the Canadian government imposes a tariff on imported T-shirts:Canadian consumers of T-shirts lose.

Canadian producers of T-shirts gain.

Canadian consumers lose more than Canadian producers gain.

Society loses: a deadweight loss arises.



The total surplus with free international trade.– The world price– Imports– Consumer surplus– Producer surplus– The gains from free trade

Total surplus is maximized.

The winners and losers from a tariff.

The $2 tariff is added to the world price, which increases the price in Canada to $7.

The quantity of T-shirts produced in Canada increases and the quantity bought in Canada decreases.


Consumer surplus shrinks to the green area.

Producer surplus expands to the blue area.

Area B is a transfer from consumer surplus to producer surplus.

Imports decrease.

Tariff revenue equals area D: Imports of T-shirts multiplied by $2.


The cost of producing a T-shirt in Canada increases and creates a social loss shown by area C.

The decrease in the quantity of imported T-shirts creates a social loss shown by area E.

The tariff creates a social loss (deadweight loss) equal to area C + E.


• Import Quotas– An import quota is a restriction that limits the

maximum quantity of a good that may be imported in a given period.

– For example, Canada imposes import quotas on food products such as meat, eggs, and dairy products and manufactures such as steel.


The market before the government imposes an import quota on T-shirts.

The world price is $5 and

Canada imports 4 million T-shirts a year.


The market with an import quota of 1 million T-shirts.

With the quota, the supply of T-shirts in Canada becomes S + quota.

The price rises to $7.

The quantity produced in Canada increases and the quantity bought decreases.

Imports decrease.


– Winners, Losers, and Social Loss from an Import Quota

– When the Canadian government imposes an import tariff on imported T-shirts:

Canadian consumers of T-shirts lose. Canadian producers of T-shirts gain. Importers of T-shirts gain. Society loses: a deadweight loss arises.

The following diagram illustrates the winners and losers with an import quota.


The total surplus with free international trade is maximized.


The import quota raises the price of a T-shirt to $7 and decreases imports.

Area B is transferred from consumer surplus to producer surplus.

Importers’ profit is the sum of the two areas D.

The area C + E is the loss of total surplus—a deadweight loss created by the quota.


•Other Import Barriers–Thousands of detailed health, safety, and other regulations restrict international trade. –Export Subsidies–An export subsidy is a payment made by the government to a domestic producer of an exported good.–Export subsidies bring gains to domestic producers, but they result in overproduction in the domestic economy and underproduction in the rest of the world and so create a deadweight loss.


ch7 (pp153- 64)- f10

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