Introduction to Microeconomics

AP/ECON1000 3.0 Fall 2010 Section A: TR; 8:30 10:00 am Section C: M; 2:30 4:30 pm W; 2:30 3:30 pm Professor: Art Noordeh, PhD
Web site: www.noordeh.pageout.net

Teaching Assistant
1. Nikolas Goyert-Stephens Office: 1131 VH Hours: MTR; 9 11 am nikgs@econ.yorku.ca Email: Mun Tham Office: Hours: Email: Stacy Shi Office: Hours: Email: Murat Nizam Office: Hours: Email:

2.

1029 VH W; 2:30 4:30 / F; 10:30 2:30 pm mtham@yorku.ca

3.

1029 VH R; 1 4 pm / F; 10:30 1:30 pm (new) qingshi@econ.Yorku.ca

4.

1131 VH TR; 11:30 2:30 pm Murat04@econ.yorku.ca

5.

Kayenat Kabir Office: 1083 VH Hours: MW; 2:30 5:30 pm Kayenat@econ.yorku.ca Email:

Course Evaluation Section A

M1 - Midterm 1(40%): M2 - Midterm 2(40%): F - Final Exam (60%): Tuesday October 19th in class Tuesday November 23rd in class 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 Evaluation Section C

M1 - Midterm 1(40%): M2 - Midterm 2(40%): F - Final Exam (60%): Monday October 18th in class Monday November 22nd in class 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: Dec.10: Last date to drop the course without receiving a grade 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 181186) & 9 Practice Exercises: All review Quizzes & OddOddnumbered problems Additional home work (recommended):
Study Guide: Chs. 7(153 164), 8(pp 181- 186) & 9, Key Concepts & odd-numbered Multiple Choice oddquestions Myeconlab: practice questions and sample quizzes.

Chapter 7 Global 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

How Global Markets Work

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.

How Global Markets Work

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.

How Global Markets Work

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.

How Global Markets Work

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.

How Global Markets Work

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.

How Global Markets Work

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.

How Global Markets Work

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.

Winners, Losers, and the Net Gain from Trade

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 Net Gain 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.

Winners, Losers, and the Net Gain from Trade

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.

Winners, Losers, and the Net Gain from Trade

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.

Winners, Losers, and the Net Gain from Trade

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.

Winners, Losers, and the Net Gain from Trade

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.

Winners, Losers, and the Net Gain from Trade

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.

International Trade Restrictions

Governments restrict international trade to protect domestic producers from competition. Governments use four sets of tools:
Tariffs Import quotas Other

import barriers Export 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.

International Trade Restrictions

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 Tshirt 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.

International Trade Restrictions

the market before the government imposes the tariff. The world price of a T-shirt is $5. With free international trade, Canada imports 4 million T-shirts a year.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

The total surplus with free international trade. The world price Imports Consumer surplus Producer surplus The gains from free trade Total surplus is maximized.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

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.

International Trade Restrictions

The total surplus with free international trade is maximized.

International Trade Restrictions

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 surplusa deadweight loss created by the quota.

International Trade Restrictions

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.

End