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Main content
Current time:0:00Total duration:6:24
POL‑1 (EU)
POL‑1.B (LO)
POL‑1.B.1 (EK)

Video transcript

in this video we're going to think about how trade can alter the equilibrium price and quantity in a given market so what we see here is we like to do our very simplified examples of markets in various economies so first we have country a and let's say it's the market for widgets and we're going to assume that country a is not trading with anyone else so it is an autarky a very fancy word which just means that this country is operating independently its operating in isolation and so you can see the demand curve in this market in orange and we can see the supply curve and you can see when this country is operating in isolation this market for widgets has an equilibrium price it looks like it's a little bit under $4.00 I'll just assume that the prices in dollars per widget and the equilibrium quantity looks like it's about a little under 4 units per whatever time period we're looking at fair enough now let's look at country B and let's assume that they are also operating independently it's an auto key in this market and so here we can see a different demand curve than what we saw in country a and a different supply curve and notice they have a different equilibrium price and quantity so here the equilibrium price seems to be a little bit over $1 and the equilibrium quantity seems to actually be not that different than what we saw in the first country although in many situations it could be very different now let's imagine what would happen if they opened up their economies to each other well then you would essentially horizontally add these two demand curves and you would horizontally add these two supply curves to come up with a new supply curve and a new demand curve this is a little bit of a review of what we've seen in other videos but notice at a price of 5 in total no-one's demanding anything no quantity of these widgets and then at a price of 0 country a the market there's demanding 15 and country B is demanding 5 so an aggregate they are demanding 20 and similarly you can see that with supply that at a price of 5 country a will supply 5 and at a price of 5 country B will supply 15 and so and together they will supply 20 units per time period and so we can view this right over here as our supply and demand curves for the combined markets because now they are trading we are not in an autarky anymore and notice what has happened our equilibrium price is now someplace in between these two equilibrium prices so it looks like it's a little bit under $3 and our equilibrium quantity our equilibrium quantity is a little bit under 10 units and so you might notice some interesting things that are happening what would happen from a someone in country a's point of view the people who are the the buyers the people who are demanding this widget well now instead of having to pay almost for they're paying someplace in between 2 & 3 this is the new equilibrium price if they were to open up their economy and so what you have is is that this this amount would be produced by in theory by the domestic manufacturers so the first let's call that two and a half units and then the remainder where they're going to get those units from well those are going to be imports and let's look at the equilibrium price on country B and country B was really the lower cost producer and so country B now we have a let's put it a little bit over 2.5 so let's put it right over there and so now you have a situation where the suppliers in country B are going to be producing a lot a lot more than they were before and only this amount is coming from their domestic demand and then all of this amount right over here that is being exported and if we're assuming that the world economy is only made up of country a and Country B or that they're only trading with each other these exports become country a's imports right over there and so proponents of free trade will say hey look the overall consumer surplus is larger than the combined consumer surplus is that we had before before you had this consumer surplus in country a and Country B it was all of this but still this entire area is larger than these two combined and you could do it mathematically if you like calculate the area of these triangles and if you look at the producer surplus you'll see a similar story the total producer surplus of the combined economies now this is going to be larger than this producer surplus plus this producer surplus now some there will not always be winners in this the winners here are the demanders in country a because instead of this little small consumer surplus that they had before now they have this much larger consumer surplus right over there and then the other winners are the suppliers in country B because instead of this producer surplus that they had before they now have this producer surplus but the losers in this situation are the suppliers in country a who now have a much lower producer surplus so their triangle has shrunk to that right over there and then the other losers in this situation are the consumers in country B who would have to pay a higher equilibrium price and so their consumer surplus is only this small triangle wouldn't before it was this whole thing so anyway the big takeaway here is is that if you go from autarky to opening up economies it can affect what the equilibrium prices and quantities are going to be and oftentimes or usually it's going to increase your total consumer and producer surplus although there will be some winners and there will be some losers
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