1. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
100
“A”
P0
P 1
This economy is “closed” to outside
trade .
It is in a state of “Autarky”.
The Market for Good “X” is in equilibrium at
P Domestic and Qe* Domestic at a Quantity of 100
2. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Q e*
Domestic
100
P0
P 1
Now assume it decides to become an
“Open” Economy and trade with the
rest of the world
It comes out of the state of Autarky.
The world price of Good X (“P World”)
is lower than the Domestic Price.
3. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Qs
Domestic
50
Qd
Domestic
150
Q e*
Domestic
100
P0
P 1
At the lower world price, ceterus
paribus, the Quantity Demanded is
going to INCREASE to “Qd Domestic
(150)” at Point “C”.
4. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Qs
Domestic
50
Qd
Domestic
150
Q e*
Domestic
100
P0
P 1
KEY POINT: We move ALONG our
respective Demand and Supply Curves
because of a CHANGE IN THE PRICE OF
GOOD X.
Price Decreases, Quantity Demanded
INCREASES (150) We move from Point
“A” on the Demand Curve to Point “C”
5. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Qs
Domestic
50
Qd
Domestic
150
Q e*
Domestic
100
P0
P 1
…and the Quantity Supplied is going to
DECREASE to “Qs Domestic (50)” at
Point “B”.
6. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Qs
Domestic
50
Qd
Domestic
150
Q e*
Domestic
100
P0
P 1
KEY POINT: We move ALONG our
respective Demand and Supply Curves
because of a CHANGE IN THE PRICE OF
GOOD X.
Price Decreases, Quantity Supplied
DECREASES (50) We move from Point
“A” on the Supply Curve to Point “B”
7. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Qd
Domestic
Q e*
Domestic
100
Qs
Domestic
50
Qd
Domestic
150
IMPORTS
100
P0
P 1
Now we have changed the dynamics
Of the Market Supply Curve for Good X.
Because the Domestic Quantity Supplied
Has decrease to “50” and the Domestic Quantity
Demanded has increased to 150 AND
we are open to trade that means the difference
is made up with IMPORTS of “100” (150-50)
8. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
P World
“A”
“B” “C”
Qd
Domestic
Q e*
Domestic
100
Qs
Domestic
50
Qd
Domestic
150
IMPORTS
100
P0
P 1
Domestic Producers are only going to
Supply 50 units of Good X at the Pworld .
(From 0 units to 50 units at Point “B”)
So that part of the Supply Curve will remain the same.
(Highlighted in YELLOW).
9. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
Qd
Domestic
Q e*
Domestic
100
Qs
Domestic
50
Qd
Domestic
150
IMPORTS
100
P0
P 1
The Supply Curve now diverges from
the original one.
At P world it becomes HORIZONTAL to
reflect at that price the Quantity Demanded
is 100 more than Domestic Producers are willing
to supply of Good X (amount from Point “A” to Point “C”)
10. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
Qd
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qd
Domestic
150
IMPORTS
100
P0
P 1
We can extend the new Supply
Curve beyond Point “C” with
the assumption that at a higher
Price Domestic AND Foreign Producers
will be willing to Supply more of Good X.
11. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
Qd
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qd
Domestic
150
IMPORTS
100
P0
P 1
So, with an Open economy we have a new
Market Supply Curve for Good X that is
comprised of Domestic AND Foreign
Quantity Supplied for Good X that lies to
The RIGHT of the original Market Supply Curve
“S Domestic*)
We label the new Supply Curve
“S Domestic + Imports”
12. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
Qd
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qd
Domestic
150
IMPORTS
100
P0
P 1
Domestic Producers of Good X are NOT going to like this turn of events as
it affects their ability to Supply more of this good at a higher Price.
You know, like the good ol’ days at “P Domestic” and “Qe* Domestic(100”)
They are going to seek protection from this low priced foreign Good.
Assume they lobby Congress and the President and get a restriction on the
amount of Good X that can be IMPORTED.
This is called a QUOTA.
13. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
“D” “E”
IMPORTS
50
P0
P 1
Assume Producers are successful in getting an IMPORT
QUOTA on Good X and the maximum amount that can
be imported is 50 units of Good X.
This is represented by Points “D” and “E” and it
represents a NEW section of a NEW Supply Curve for
Good X that accounts for the Foreign Supply of Good X.
14. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
P0
P 1
IMPORTS
50
The NEW Domestic Market Price for Good X
will be “P Quota”. The Price INCREASES
because the Total Supply is LESS than it was before.
(You will see that in a moment when the
Supply Curve shifts LEFT)
15. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B” “C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
P0
P 1
IMPORTS
50
At the higher price the Quantity Demanded DECREASES
rom 150 to 125. We move ALONG the Market Demand
Curve from Point “C” to “E”.
16. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“B”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
P0
P 1
IMPORTS
50
At the higher price the DOMESTIC Quantity SUPPLIED INCREASES
from 50 to 75. We move ALONG the Market SUPPLY Curve from Points “B” to “D”.
This is the benefit of the Quota derived for Domestic producers of Good X.
They get to Supply a larger quantity (75 instead of 50at a higher price
BUT this is also the cost to consumers of Good X because they get to
Consume LESS of this good (125 instead of 150) and at a HIGHER price
(P Quota instead of P World)
17. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
We finish out the new Supply Curve
And get:
“S Domestic + Imports w/quota”
“B”
18. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
To sum up to this point: Our Original Market Equilibrium
WITHOUT TRADE was at Point “A”
19. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
Our new market equilibrium WITH trade
Was at Point “C”. (Supply Curve shifted to
The RIGHT with the addition of IMPORTS (100)
“B”
20. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
Our new market equilibrium WITH trade
BUT with a QUOTA is at Point “E”. (Supply Curve shifted to
The LEFT with the RESTRICTIONS of IMPORTS (50)
“B”
21. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
Dead Weight Loss (DWL) is created as a result of the Quota.
DWL to Consumers is equal to the RED TRIANGLE
Consumers do not get to enjoy a greater quantity of the good (25 Units)
The LOWER world price “P World”. It
“B” DWL
22. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
Dead Weight Loss (DWL) is created as a result of the Quota.
DWL to SOCIETY is equal to the BLUE TRIANGLE
Domestic resources that were NOT allocated to produce Good X before the Quota are now employed to
produce the 25 additional units of Good X.
This represents the OPPORTUNITY COST to society for the implementation of the QUOTA.
Economists ask: “Could those freed up resources have been allocated to a more/higher productive use?
“B” DWLDWL
DWL
23. Market for Good X
Price
Of
Good X
Quantity of Good X
P Domestic*
S Domestic*
D Domestic*
Q e*
Domestic
P World
“A”
“C”
Qs
Domestic
S Domestic + Imports
Q e*
Domestic
100
Qs
Domestic
50
Qs
Domestic
75
Qd
Domestic
150
Qd
Domestic
125
P Quota
“D” “E”
S Domestic + Imports w/quota
P0
P 1
IMPORTS
50
The last part I will leave to you. Locate ALL the areas of SURPLUS (lost and/or gained) as a result of
The implementation of a QUOTA. HAVE FUN!!
“B” DWLDWL
DWL