Will the aggregate quantity of goods and services demanded become more

sensitive or less sensitive to changes in the price level if an economy
becomes closed (that is, as foreign trade disappears)? In terms of the
AD/AS diagram, will the AD curve become steeper or flatter?

Think it through, what would happen, from a producer's point of view, if his foreign competitors suddenly disappeared? Alternatively, what is the shape of the demand curve, from a producers point of view, of a producer in a perfectly competitive market? in a monopolistic competition market?

If an economy becomes closed, meaning foreign trade disappears, the aggregate quantity of goods and services demanded will become more sensitive to changes in the price level. In terms of the AD/AS diagram, the AD curve will become steeper.

From a producer's point of view, if foreign competitors suddenly disappear, it would result in less competition in the market. This would mean that the producer can increase the prices of their goods or services without losing customers to foreign competitors. As a result, the demand curve from the producer's perspective will be steeper or more price elastic.

In a perfectly competitive market, producers have no market power and are price takers. The demand curve for a producer in this market is perfectly elastic, meaning it is horizontal. This is because any increase in price would result in consumers switching to other producers offering lower prices.

In a monopolistic competition market, producers have some market power and can differentiate their products. The demand curve for a producer in this market is downward sloping, but it is not as steep as it would be in a perfectly competitive market. This is because consumers have some brand loyalty or preference for certain differentiated products.

To determine whether the aggregate quantity of goods and services demanded becomes more or less sensitive to changes in the price level when an economy becomes closed, let's analyze the impact of foreign trade on the economy.

When an economy becomes closed, it means that foreign trade disappears, and the economy relies solely on domestic production and consumption. In this case, the demand for goods and services will generally become less sensitive to changes in the price level. Here's why:

1. Loss of foreign competition: When foreign trade disappears, domestic producers will face less competition from foreign producers. This can result in reduced pressure to lower prices to remain competitive. Without the presence of foreign competitors (who could potentially offer cheaper alternatives), domestic producers may have more flexibility to set higher prices without significantly affecting the quantity demanded.

2. Reduced variety of goods: Closed economies often have limited access to foreign goods and services, which leads to a decrease in the variety of products available to consumers. Consequently, the demand for goods and services becomes less elastic, meaning that consumers may be less likely to substitute goods based on price changes. As a result, changes in price level may have a smaller impact on overall demand.

From a graphical perspective, this change in demand sensitivity is represented by the shape of the Aggregate Demand (AD) curve in the AD/AS diagram. When an economy is open, the AD curve is relatively flatter, indicating a higher responsiveness of demand to changes in the price level. Conversely, when an economy becomes closed, the AD curve becomes steeper, implying lower sensitivity to price changes.

Regarding the shape of the demand curve from a producer's point of view in different market structures:

1. Perfectly competitive market: In a perfectly competitive market, where there are many buyers and sellers, each producer has limited control over the price of their goods. Therefore, the demand curve for an individual producer in a perfectly competitive market is perfectly elastic, which means that they must accept the prevailing market price to sell their goods.

2. Monopolistic competition market: In a monopolistic competition market, there are many sellers offering differentiated products. Each producer has some control over the price of their goods due to product differentiation. As a result, the demand curve for a producer in a monopolistic competition market is downward sloping, indicating that they can adjust prices to influence the quantity demanded.

In summary, when an economy becomes closed (foreign trade disappears), the aggregate quantity of goods and services demanded is likely to become less sensitive to changes in the price level. This is reflected by a steeper AD curve in the AD/AS diagram. The shape of the demand curve from a producer's point of view varies depending on the market structure: perfectly competitive markets have a perfectly elastic demand curve, while monopolistic competition markets have a downward-sloping demand curve.

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