Suppose the U.S is an importer of product X and that there are no trade restrictions. Let us assume 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 how this change affects the well-being of U.S. consumers and U.S. producers of product X. (You can assume that the U.S. is a small country in the world market for product X.)
ii) After the fall in price, consumers buy 1.2 million units of X, of which 200,000 are produced domestically and 1 million are imported. Calculate the change in the consumer well-being and producer well-being from the price reduction. Which is larger? Why?
Mary -- apparently Jiskha does not have volunteers whose expertise is economics.
To understand how a technological advance in Japan affects the well-being of U.S. consumers and producers of product X, we can analyze the situation using the concept of supply and demand.
a) Graphical Analysis:
1. Start by drawing a graph with quantity on the x-axis and price on the y-axis.
2. Plot the initial demand curve, D1, representing the quantity of product X that U.S. consumers are willing to buy at different prices. Since the U.S. is a small country in the world market, it takes the world price as given, so the demand curve is perfectly elastic at that price.
3. Plot the initial domestic supply curve, S1, representing the quantity of product X that U.S. producers are willing to supply at different prices.
4. Use the initial values given: U.S. consumers buy 1 million units of X annually, with 400,000 produced domestically and 600,000 imported. Place these points on the graph.
5. Find the equilibrium price and quantity where the demand and supply curves intersect.
6. Now, assume a technological advance in Japan lowers the world price of X by $100. This change is represented by a leftward shift of the supply curve, to a new supply curve, S2. The new intersection of the demand curve with the lower supply curve represents the new equilibrium.
ii) Calculation of Consumer and Producer Well-being Changes:
1. After the price falls, consumers buy 1.2 million units of X annually, with 200,000 produced domestically and 1 million imported. Use these values to determine the new equilibrium price and quantity.
2. Calculate the change in consumer well-being by finding the area between the initial and new demand curves. Since the price decreases, consumer surplus increases, implying higher well-being.
3. Calculate the change in producer well-being by finding the area between the initial and new supply curves. Since the price decreases, producer surplus decreases, implying lower well-being.
4. Compare the changes in consumer and producer well-being. In most scenarios, consumer well-being increases more than the decrease in producer well-being. This is because as the world price falls, consumers benefit from lower prices and a greater quantity of imports. Producers, on the other hand, face increased competition and lower prices, reducing their surplus.
Remember, these calculations can be done by measuring the area of the relevant triangles and rectangles between the initial and new curves.