Chapter 33: Terms of Trade

Transcription

1 Chapter 33: Terms of Trade 1

2 The Terms of Trade The division of the gains from trade depends on the terms of trade. The terms of trade are measured by the ratio of the price of exports to the price of imports. Terms of Trade = Index of Export Prices Index of Import Prices x 100 Copyright 2011 Pearson Canada Inc.

3 A rise in the index: country gets more imports per unit of exports a favourable change for the country A fall in the index: country gets fewer imports per unit of exports an unfavourable change for the country Copyright 2011 Pearson Canada Inc.

4 Index Numbers 4

5 5 Index Numbers Used to compare changes in some variable relative to some base period. Important when the variables are measured in different units. Value of index in given period = absolute value in given period absolute value in base period X 100 Expresses the value of some series in any given year as % of its value in the base year

6 Index Numbers: An Example 6

7 7 Index Numbers: An Example For each index number the value in the base year is 100. Index Steel in 2011=122.5 that means that in 2011 the steel output was 22.5% greater than in 2001.

8 8 How much steel output changed from 2005 to 2007? Index steel output in 2005=125.0 Index steel output in 2007=132.5 Percentage increase: ( )/125.0=0.06, or 6%

9 9 Changes in quantity demanded and shifts of the demand curve

10 10 of 21 Demand Schedules and Demand Curves Demand Schedule Demand curve 140 U V W X Y Price per Tonne Quantity Demanded Price of Carrots Y X W V U D Quantity of Carrots Copyright 2011 Pearson Canada Inc.

11 11 of 21 A change in variables other than price will shift the demand curve to a new position. average household income prices of other products distribution of income or population expectations about the future Price of Carrots D 0 Y D 1 X W V U Quantity of Carrots Copyright 2011 Pearson Canada Inc.

12 12 Do I need to know the algebra of market equilibrium? YES!

13 Price Elasticity of Demand 13

14 The Measurement of Price Elasticity 14 of 24 Elasticity (Greek letter eta:η) is defined as: η = percentage change in quantity demanded percentage change in price Demand elasticity is negative, but economists usually emphasize the absolute value. It is also unit free. Copyright 2011 Pearson Canada Inc.

15 The Measurement of Price Elasticity 15 of 24 We are interested in the arc elasticity. η = ΔQ D /Q D Δp/p Price A B Elasticity usually measures the change in p and Q relative to some base values of p and Q. Which ones to use? Quantity We will use the average price and quantity Copyright 2011 Pearson Canada Inc.

16 Demand elasticity between point A and point B on some demand curve is: 16 of 24 η = ΔQ D /Q D Δp/p where p and Q D are the average price and average quantity, respectively. It can also be written as: η = (Q B -Q A )/[(Q B + Q A )/2] (p B -p A )/[(p B + p A )/2] (Q B -Q A )/Q = (p B -p A )/p Copyright 2011 Pearson Canada Inc.

17 17 of 24 Elasticity falls as you move down a linear demand curve. 10 Elastic η>1 Price 5 Unit Elastic η=1 η<1 Inelastic Quantity Demanded Copyright 2011 Pearson Canada Inc.

18 Other elasticities 18 of 24 Price elasticity of supply: Similar to price elasticity of demand. Income elasticity of demand: Normal (elasticity>0) Inferior goods (elasticity<0) Cross elasticity of demand: Complement (elasticity<0) Substitute (elasticity>0) Copyright 2011 Pearson Canada Inc.

19 Price floor, price ceiling and quotas 19

20 Price floor and price ceiling 20 of 24 Price p 1 p 0 p 2 Excess supply E Excess demand S Price floor Price ceiling D Q 1 Q 0 Q 2 Quantity Copyright 2011 Pearson Canada Inc.

21 Substitution and Income Effects 21

22 Substitution and Income Effects 22 of 24 Copyright 2011 Pearson Canada Inc.

23 Marginal and Total Utility 23

24 24 of 20 Utility Schedules and Graphs Movies Attended per Month Total Utility Marginal Utility Utility Marginal Utility total utility Quantity of Movies marginal utility Quantity of Movies Copyright 2011 Pearson Canada Inc..

25 25 of 20 Utility Maximizing Condition A utility-maximizing consumer allocates expenditures so that the utility obtained from the last dollar spent on each product is equal. For two products X and Y, the utility-maximizing condition is: MU X p X = MU Y p Y or MU X MU Y = p X p Y In the second equation, we see the consumer adjusting her consumption (and thus the ratios of MUs) in response to changes in relative prices. Copyright 2011 Pearson Canada Inc..

26 Producers in the short run 26

27 27 of 20 TP AP MP Total product Quantity of Labour Quantity of Labour MC TC Cost ATC AVC AFC Cost TVC TFC Output Output Copyright 2011 Pearson Canada Inc..

28 28 of 20 Remember! Make sure you understand the relationship between: MP and AP MC and AVC and ATC Make sure you understand table 7-2. Assume that all firms have the same structure of costs (remember that natural monopolies are special!) Copyright 2011 Pearson Canada Inc..

29 29 of 20 Study Guide. Ex. 11 page 183 If the level of production is 50 units, TFC is a) $350 b) $7 c) $500 d) $10 e) Indeterminable with data provided Copyright 2011 Pearson Canada Inc..

30 Producers in the long run 30

31 31 of 15 The relationship between long-run and shortrun costs Cost per Unit SRATC curves LRAC Output per Period A short-run ATC curve cannot fall below the LRAC curve. Each SRATC curve is tangent to the LRAC curve at the level of output for which the quantity of the fixed factor is optimal. Copyright 2011 Pearson Canada Inc.

32 32 of 20 Long Run Average Cost Curve For two factors K and L, the cost-minimizing condition is: MP K MP = L or p K p L MP K MP L = p K p L Copyright 2011 Pearson Canada Inc..

33 33 Diminishing marginal returns and diseconomies of scale

34 34 of 20 Diminishing Marginal Product vs. Diseconomies of Scale Say Q = f(k,l) Diseconomies of scale: multiply K and L by a>1, then f(a*k,a*l) < a*f(k,l) Diminishing marginal product: At some point, for fixed K, f(k,l+1)-f(k,l) < f(k,l)-f(k,l-1) Copyright 2011 Pearson Canada Inc..

35 Different market structures 35

36 36 of 20 Idea: consider both costs and demand! MC p ATC AVC AFC Q New concepts: TR, AR and MR Copyright 2011 Pearson Canada Inc..

37 37 of 20 Idea: consider both costs and demand! MC ATC AVC AFC Q New concepts: TR, AR and MR Copyright 2011 Pearson Canada Inc..

38 38 of 20 Should the Firm Produce at All? The rule: firm does not shut down if p>avc How Much Should the Firm Produce? The rule: choose output where MR = MC. Profits = (p - ATC) x q Copyright 2011 Pearson Canada Inc..

39 39 of 20 Summary Perfect Competition Monopolistic Competition Oligopoly Monopoly Many small firms. All firms are price takers. Free entry and exit. Zero profits in the long run equilibrium. AR = MR = price Price = MC Many small firms. Some market power. Free entry and exit. Zero profits in the long run equilibrium. Excess capacity Price > MC Few large firms. Considerable market power. Often significant entry barriers. Profit depend on the nature of the rivalry and on entry barriers. Price > MC Single firm faces the entire market demand. Total market power. Entry barriers Profits can persist if sufficient entry barriers. Price > MC Copyright 2011 Pearson Canada Inc..

40 40 of 20 Perfect competition vs other market structures Copyright 2011 Pearson Canada Inc..

41 41 of 20 Perfect Competition: Short Run Perfect Competition: Long Run Copyright 2011 Pearson Canada Inc..

42 42 of 20 Monopolistic Competition: Short Run Monopolistic Competition: Long Run Copyright 2011 Pearson Canada Inc..

43 43 of 20 Monopoly Cartels Effects of cartels, problems that cartels face Price discrimination Types of price discrimination Consequences of perfect price discrimination Copyright 2011 Pearson Canada Inc..

44 Oligopoly: Nash Equilibrium 44

45 45 A s output One-half monopoly output Two-thirds monopoly output B s output One-half monopoly output Two-thirds monopoly output Cooperative Outcome Nash equilibrium But notice that the Nash equilibrium does not maximize joint profits this is the classic example of the prisoners dilemma! Copyright 2011 Pearson Canada Inc..

46 46 Demand curves for firms in different market structures