Suppose the U.S. is an importer of product X and that there are no trade restrictions. Let us asuume that the U.S. consumers buy 1 million units of X each year, of which 400,000 are produced domestically and 600,000 are imported.
A. Suppose a technological advance in Japan causes the world price of X to fall by $100. Draw a graph to show this change affects the well-being of U.S. consumers and U.S. producers of product X. ( you can assume the U.S. is a small country in the world market for product X.)
I need help in figuring out how to go about and solve or know the effects so i can be able to draw a graph...
To solve this problem and understand the effects of a technological advance in Japan on the well-being of U.S. consumers and producers of product X, you need to consider the changes in prices and quantities.
1. Determine the initial equilibrium: Before the technological advance, the U.S. is an importer, so the world price of X determines the domestic price. Let's assume the initial world price is $Pw and the domestic price is also $Pw because there are no trade restrictions. At this price, U.S. consumers buy 1 million units (400,000 domestically produced, 600,000 imported).
2. Analyze the impact of the technological advance: When a technological advance in Japan causes the world price of X to fall by $100, the new world price becomes $Pw - $100.
3. Determine the new equilibrium: With the lower world price, both U.S. producers and importers will adjust their behavior.
- U.S. Producers: Previously, U.S. producers were supplying 400,000 units at the old price. However, with the lower world price, their domestic production might not be as competitive. It's possible that some U.S. producers might reduce their output or even exit the market. Let's assume that domestic production decreases to 300,000 units.
- U.S. Importers: At the lower world price, U.S. importers would find it more affordable to buy the imported product. The quantity of imports would likely increase. Let's assume imports increase to 700,000 units.
Now, you have the new equilibrium quantities: domestic production = 300,000 units, imports = 700,000 units.
4. Analyze the well-being of U.S. consumers and producers:
- U.S. Consumers: With the lower world price, U.S. consumers benefit from the lower price of X. They can consume more at a lower cost. The consumer surplus (the additional value consumers receive above what they paid) will increase.
- U.S. Producers: Due to reduced domestic production and increased imports, U.S. producers might face lower demand for their product. As a result, their producer surplus (the additional value they receive above their costs) might decrease.
Now, use this analysis to draw a graph. The vertical axis represents price, and the horizontal axis represents quantity. Draw the demand curve to show consumer demand for X. Label the initial equilibrium point where domestic production and imports meet consumer demand. Then, show the impact of the technological advance by shifting the supply curve to reflect the new equilibrium point with reduced domestic production and increased imports. The area between the demand curve and the price axis represents consumer surplus, while the area between the supply curve and the price axis represents producer surplus.