WORLD WITHOUT TRADE

1
WORLD WITHOUT TRADE
SOJU
WITHOUT TRADE THE PRODUCTION POSSIBILITY FRONTIER
(PPF) CONSUMPTION POSSIBILITY FRONTIER (CPF)
1. UNATTAINABLE SPACE OUTSIDE PPF INDICATES
SCARCITY 2. OPPORTUNITY COST DOWNWARD SLOPE
IMPLIES TRADEOFF 3. NECESSITY OF CHOICE
SELECTING ONE POINT PRECLUDES ANY OTHER
SPAS
2
ADRIANNE AND KEN AND COMPARATIVE ADVANTAGE
(CA) TIME PER UNIT ADR KEN COOK 10 min 40
min CLEAN 20 min 30 min OPPORTUNITY COST
TABLE A K CK 1 CK1/2 CL 1 CK4/3 CL
1/2 lt 4/3 ADRIANNE CA IS CK CL 1 CL2 CK
1 CL 3/4 CK 3/4 lt 2 KEN CA IS CL TRADING
RANGE IF COUNT 1 CL ___ CK, 3/4 TO 2 IS
RANGE IF ABOVE RANGE, EG 5, CL (KEN) OK, BUT ADR
REFUSES ADRIANNE CONTRIBUTES TIME FOR 5 CK 5
(10)50 m RECEIVES 1 CL 20 m, THUS REFUSES
3
ADRIANNES PPF AND MAXIMUM CPF
COOKING
ONE HOUR
6
MAX CPF (_at_ KENS OPPORTUNITY COST)

PPF
CLEANING
8 6 (4/3)
3
4
NONLINEAR PPF AND PREFERENCES
INDIA
CURRY
POSTTRADE CONSUMPTION POINT
D
POSTTRADE CPF
IMPORT
B
PRETRADE SLOPE -(1/3) MRPT RCS
POSTTRADE PRODUCTION POINT (SLOPE -2)
C
WEB
EXPORT
SINGAPORE OFFERS 2 CURRIES PER WEB
5
Economic Model FormatDemand and Supply Example

• 1. NAME (Demand and Supply)
• 2. FOCUS VARIABLES (Price and Quantity)
• 3. INSTRUMENTAL Important but unplotted (other
  prices, income, preferences,expectations...)
• 4. SCHEDULES (Demand and Supply)
• 5. EQUILIBRIUM CONDITIONS (D S)
• 6. DISEQUILIBRIUM ANALYSIS (Pressures)
• 7. SHIFT/TILT (Change in D or S)

6
MILLER/FISHE (M/F) FIG. 1.1

Marginal Cost
Marginal Benefit (MB)
Meetings
MBltMC
Optimal Level (MBMC)
MBgtMC
7
MARKET SURPLUS/SHORTAGE
P
SURPLUS (SgtD_at_P1)
S
P1
P equil
P2
SHORTAGE (SltD_at_P20
D
Q
Q (DS)
8
CONSUMER SURPLUS
WILLINGNESS TO PAY
CONSUMER SURPLUS
FORCED TO PAY
9
DEMAND CURVE EXTREMES
P
D vertical
M/F 2.7
Many close substitutes elas - infinity
D horizontal
No close substitutes elax 0
Q
10
MARKET PRESSURES
M/F 2.10
P
S
SURPLUS _at_ P P 0
P 0
Market Supply
EQUILIBRIUM _at_ P P e
P e
Market Demand
P 1
SHORTAGE _at_ P P 1
D
Q
11
DEMAND INCREASE
M/F 2.11 (a)
P
S
P 1 P 0
D 1
D 0
Q
Q Q 0 1
12
DEMAND DECREASE
M/F 2.11 (a)
P
S
P 0 P 1
D 0
D 1
Q
Q Q 1 0
13
SUPPLY INCREASE
M/F 2.11 (c)
P
S 0
P 0 P 1
S 1

D
Q
Q Q 0 1
14
SUPPLY DECREASE
S 1
P
M/F 2.11 (d)
S 0
P 1 P 0
D
Q
Q Q 1 0
15
ELASTICITY TOTAL REVENUE
ELASTIC - inf lt e lt -1
P
M/F 2.14
UNIT ELASTICITY
INELASTIC 0 gt e gt -1
MR
D AR
Q
TR
MR 0
Q
Q
16
SURPLUSES CONSUMER PRODUCER
P
M/F 3.5
S
CONSUMERS SURPLUS
P 0
PRODUCERS SURPLUS
D
Q
Q 0
17

PROFIT
PRODUCERS SURPLUS
M/F 3.6
INCREASE Q FROM C TO D 1) INCREASES REVENUES BY
500 (500 - 400) X 10 2) INCREASES COSTS BY AREA
CEBD AND 3) INCREASES PRODU- SERS SURPLUS BY THE
DIFFERENCE, AREA ABE
P
A
B
10
E
MARKET SUPPLY
Q
500 D
450 C
18
DEADWEIGHT LOSS FROM TAX
CONSUMER DEADWEIGHT LOSS AREA ABE
M/F 3.7
P
S TAX
A
P 1
S
E
B
P 0
PRODUCER DEADWEIGHT LOSS AREA BCE
C
UNIT TAX
D
Q
Q 1
Q 0
19
QUOTA VS FREE TRADE
M/F 3.9
WORLD SUPPLY LESS UNRESTRICTED EX- PORTS TO US
S dom
S dom quota
P
S dom unrestricted imports
21.4 P fm 9.3
WORLD SUPPLY LESS US QUOTA
DOMESTIC DEMAND
WORLD DEMAND W/O US
15.4 16
242
Q
20
QUOTA VS FREE TRADE
M/F 3.9
WORLD SUPPLY LESS UNRESTRICTED EX- PORTS TO US
S dom 0 import
WORLD SUPPLY LESS US QUOTA
S dom quota
P
S dom unrestricted imports
P 0 imp
21.4 P fm 9.3
World Supply with US Imports 0
DOM ESTIC DEMAND
WORLD DEMAND W/O US
15.4 16
Q (non US) fm
242
Q (0 US imports)
Q
21
MINIMUM WAGE SKILL
M/F 3.10
Skilled
Unskilled
S
Surplus
W min
W 0
D
Q SK
Q UNSK
Q Q d s
22
TOTAL, AVERAGE, AND MARGINAL PRODUCT CURVES
Q
M/F 8.3
TOTAL PRODUCT CURVE
L
Q of AP MP L L
AP L
L
MP L
23
THREE PRODUCTION STAGES
M/F 8.4
STAGE I
STAGE II PROFIT MAX
Q of AP MP L L
STAGE III
AP L
L
MP L
6
10
24
ISOQUANT SUBSTITUTING LABOR FOR CAPITAL
M/F 8.7
ISOQUANT SLOPE MRTS Marginal Rate of
Technical Substitution change in K / change in L
K
SLOPE -3/1
DIMINISHING MRTS MEANS FOR A FIXED ADDITION OF L,
K SAVED DIMINISHES AS L RISES
SLOPE -2/1
SLOPE -1/2 -1/2 1
Q 100
L
25
SHORT-RUN COST CURVES
M/F 9.2
COST
MC CUTS MINIMUM AVC ATC FROM BELOW
MC
ATC
AVC
57
ATC AVC AFC
40
17
AFC
Q
26
ISOQUANT LEAST-COST POINT
K
M/F 9.6
b
At the point of tangency, isoquant slope
isocost slope, I.e. MRTS -w/r - P /P
- P /P
1
E E P r K
L K
H V
OPTIMUM, A, IS SUPERIOR TO ANY OTHER ISOQUANT
POINT, BECAUSE IT IS CHEAPER FOR FIXED OUTPUT
K
A
E 1000 gt 800
b
2
Q 100
E 800
L
E/P E/w L
L
27
ISOCOST MAX-OUTPUT POINT
K
MF 9.6
At the point of tangency, isoquant slope
isocost slope, I.e. MRTS -w/r - P /P
- P /P
E E P r K
C
1
L K
H V
OPTIMUM IS SUPERIOR TO ANY OTHER ISOCOST POINT,
BECAUSE IT MAXS OUTPUT FOR FIXED COST
A
K
Q 100
C
2
E 800
Q 70 lt 100
L
E/P E/w L
L
28
INPUT PRICE RISE
M/F 9.8
P ( w) RISES. IF E REMAINS THE SAME, THE
ISOCOST, C SHIFTS TO ISOCOST, C , AND THR FIRM
IS WORSE OFF, SINCE IT CAN NO LONGER
PRODUCE 100 UNITS FOR THE ORIGINAL EXPENDITURE,
E.
L
K
0
E E P r K
1
A
K
Q 100
C
0
C
W gt W
E/w lt E/w
1
1
0
1
0
L
0
1
E/P E/w L
L
0
E/P E/w
1
29
INPUT PRICE RISEE CONSTANT PENALTY IS LOST
OUTPUT, Q, AS OPTIMUM SHIFTS FROM A TO G
P ( w) RISES. IF E REMAINS THE SAME, THE
ISOCOST, C SHIFTS TO ISOCOST, C , AND THR FIRM
IS WORSE OFF, SINCE IT CAN NO LONGER
PRODUCE 100 UNITS FOR THE ORIGINAL EXPENDITURE,
E.
L
K
E E P r K
0
1
A
K
G
Q 100
C
0
C
Q 70
1
L
0
1
E/P E/w
E/P E/w L
0
1
L

L
30
INPUT PRICE RISE Q CONSTANTPENALTY IS EXTRA
EXPENDITURE, AS OPTIMUM MOVES FROM A TO H
K
P ( w) RISES. IF Q REMAINS THE SAME, THE
ISOCOST, C SHIFTS TO ISOCOST, C ,
AND EXPENDITURE MUST RISE AT THE NEW PRICES
H
K
L
2
1
2
A
K
Q 100
C
0
C
C
2
1
L
L
E/P E/w L
L
2
31
LONG-RUN AVERAGE COST
COST PER UNIT
SATC
1
SATC
3
LRATC
SATC
2
Min SATC
2
Q
32
SHORT-RUN COMPETITIVE FIRM
TR TC
TC(Q)
Slope TR MR MC Slope TC(Q)
TR PQ
M/F 10.1
6
FC
Q
PROFIT
PROFIT TR - TC
Q
50 90 110
-6
33
SHORT-RUN COMPETITIVE FIRM PER UNIT ANALYSIS
UNIT COSTS AND PRICE
AVC(Q)
MC(Q)
ATC(Q)
M/F 10.2
MR P AR
.50
PROFIT MAX MR MC _at_ Q 90 PROFITS (AR - ATC)
x Q
.40
Q
90
34
SHORT-RUN SHUTDOWN
UNIT COSTS AND PRICE
ATC
M/F 10.3
MC
AVC
MR MC _at_ Q 40
.38
MR P AR
.35
.23
P gt AVC _at_ Q 40, SO PRODUCE
Q
40
ATC
UNIT COSTS AND PRICE
MC
AVC
.42
MR MC _at_ Q 30
P lt AVC _at_ Q 30, SO SHUTDOWN
.22
MR P AR
.15
Q
30
35
MONOPOLY PROFIT MAX
P
M/F 11.2
SMC
SATC
160
MR MC _at_ Q 4
142.5
120
P gt MC _at_ Q 4
D
Q
20
4
10
MR
36
COMPETITIVE MKT VS MONOPOLY
P
Deadweight loss due to a monopoly equals areas E
H
M/F 11.11
MC
A B
P gt MC
m
P
m
C D E
P MC
P
c
c
F G H
D
MR
Q
Q
Q
m
c
37
REGULATING A MONOPOLY BY USING A PRICE CEILING, P
M/F 11.12
r
P
LMC
LATC
A B
P
C D
m

E F G
P
r
J
H
I
D
Q
Q
Q
MR for Q gt Q
m
r
r
38
CONSUMERS SURPLUS AND A MONOPOLY
M/F 12.1
AREA I AB AREA II C D AREA III E
P
WITH COMPETITION CONSUMERS GET SURPLUSES I
II III.
A B
C D
E
LMC LATC
MR
Q
WITH MONOPOLY, CONSUMERS KEEP AREA I, AREA II IS
TRANS-FERRED TO THE MONOPOLY, AND AREA III IS A
DEADWEIGHT LOSS NO ONE GETS
39
PRICE DISCRIMINATION SEPARATING CONSUMERS INTO
TWO GROUPS AND CHARGING DIFFERENT PRICES
M/F 12.2
High-value group
P
P
P
Low value group in- creases profit by Q times (P
- LATC)
high
low
LMC
P
low
MR
D
high
mkt
h
Q
Q
high
P
P
l
LMCLATC
P
MR
LMC
low
MR
h
low
MR
D
Q Q Q
low
mkt
high low total
Q
Q
Q
Q
total
Q
group group
high
low
40
MARKET FAILURE NATURAL MONOPOLYDEMAND CURVE
CUTS LATC WHILE LACT IS STILL DECLINING
EXTREME MC 0
P/ATC
P P (monopoly) P P (regulator) P
AC P P (economist) MC
m
r
e
I
P
m
DEMAND
II
III
LATC
P
MR
r
P
Q
Q
e
Q
Q
monopoly
economist
reg
41
MARKET FAILURE EXTERNAL EFFECT
BENEFICIARY/VICTIM
Consumer
Producer
1 2 3
4
Celebrity
Garden Cigar cons.
Privacy
Consumer

-
-
ACTOR
Union Sq.. hotel bath
5 6 7
8
Training
Paper Mill
Producer
Smokestack
-
-
Social (Benefit/Cost B/C) private (B/C)
external (B/C) Goal maximize net social
benefits by setting marginal social benefit
(MSB) marginal social cost (MSC)
42
EXTERNAL COST
M/F 17.6
S sum (MC)
P
MSC
MSC
c

Q gt Q Private market overallocates resources
to the production of citrus
c

P
P
comp
D
Q

Q
Q
competitive
43
MARKET FAILURE PUBLIC GOODS
Exclusive
Nonexclusive
Rival (individual consumption) goods
Web Intl fishing waters Congested highway
Apple
PURE PUBLIC GOODS
Nonrival (joint consumption) goods
Below capacity
National defense Lighthouse Air raid sirens
Airline seats Concert seats Horse racing