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COMMON MISTAKES ON THE AP MICRO EXAM
Compiled by: John Ostick
Malvern PrepMalvern, PA 19355
COMMON MISTAKES ON THE AP MICRO EXAM
Compiled by: John Ostick
Malvern PrepMalvern, PA 19355
Consumer and Producer SurplusConsumer and
Producer Surplus
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Consumer and Producer Surplus
• Consumer Surplus: the value you get that is in excess of what you pay to get it – On a graph, consumer surplus is the area below
the demand curve and above the price line.
• Producer Surplus: the money the firm gets that is in excess of its marginal costs– On a graph, producer surplus is the area below
the price line and above the supply curve.
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 9 Consumer and Producer Surplus on a Graph
Q/t
P
Demand
SupplyA
P*
B
C
0 Q*
• Value to the Consumer:
• 0ACQ*
• Consumers Pay Producers:
• OP*CQ*
• The Variable Cost to Producers:
• OBCQ*
• Consumer Surplus:
• P*AC
• Producer Surplus:
• BP*C
Dead Weight LossDead Weight Loss
Dead Weight Loss When the Price is Above P*
Dead Weight Loss When the Price is Above P*
Q/t
P
Demand
SupplyA
C
0 Q’ Q*
E
F
P’
P*
B
• Value to the Consumer: • 0AEQ’
• Consumers Pay Producers: • OP’EQ’
• The Variable Cost to Producers: • OBFQ’
• Consumer Surplus: • P’AC
• Producer Surplus: • BP’EF
• DWL• FEC
Dead Weight Loss When the Price is Below P*
Dead Weight Loss When the Price is Below P*
Q/t
P
Demand
SupplyA
P* C
0 Q’ Q*
E
FP’
B
• Value to the Consumer: • 0AEQ’
• Consumers Pay Producers: • OP’FQ’
• The Variable Cost to Producers: • OBFQ’
• Consumer Surplus: • P’AEF
• Producer Surplus: • BP’F
• DWL• FEC
ELASTICITY
Tax Incidence &
Effects on Revenue and Prices
ELASTICITY
Tax Incidence &
Effects on Revenue and Prices
Tax RevenuesEfficiency Loss of a TaxRole of ElasticitiesQualifications
•Redistributive Goals•Reducing Negative Externalities
TAX INCIDENCE ANDEFFICIENCY LOSS
Perfectly Inelastic Demand Perfectly Inelastic Demand
D
Q/t
P
S2
Q1=Q2
P2 S1
P1
Perfectly Elastic Demand Perfectly Elastic Demand
Q/t
P
D
S2
P1=P2
Q2
S1
Q1
Inelastic Demand (at moderate prices)
Inelastic Demand (at moderate prices)
P
Q/t
D
S1
P1
Q1Q2
S2
P2
Elastic Demand(at moderate prices)
Elastic Demand(at moderate prices)
Q/t
P
Q1
D
S1
P1
S2
P2
Q2
DIMINISHING RETURNS
DIMINISHING RETURNS
Explanation:
As additional units of a variable input (labor) are added to a fixed input (capital), at some point the additional output resulting from the addition of one more unit of variable input declines. This decline is referred to as diminishing marginal return. At this point, total product increases at a decreasing rate.
Rationale:
As the variable input increases and the fixed input, by definition, remains the same, there is less fixed input with which the variable input can be combined.
Example: As more workers are added but capital remains the same, there is less capital per worker.
Law of Diminishing Returns
SHORT-RUN PRODUCTIONRELATIONSHIPS
To
tal P
rod
uct
, TP
Quantity of Labor
Ave
rag
e P
rod
uct
, AP
, an
dm
arg
inal
pro
du
ct, M
P
Quantity of Labor
Total Product
MarginalProduct
AverageProduct
IncreasingMarginalReturns
Law of Diminishing Returns
SHORT-RUN PRODUCTIONRELATIONSHIPS
To
tal P
rod
uct
, TP
Quantity of Labor
Ave
rag
e P
rod
uct
, AP
, an
dm
arg
inal
pro
du
ct, M
P
Quantity of Labor
Total Product
MarginalProduct
AverageProduct
DiminishingMarginalReturns
Law of Diminishing Returns
SHORT-RUN PRODUCTIONRELATIONSHIPS
To
tal P
rod
uct
, TP
Quantity of Labor
Ave
rag
e P
rod
uct
, AP
, an
dm
arg
inal
pro
du
ct, M
P
Quantity of Labor
Total Product
MarginalProduct
AverageProduct
NegativeMarginalReturns
Two Approaches to Find the PROFIT
MAXIMIZING QUANTITY ( PRICE)
Two Approaches to Find the PROFIT
MAXIMIZING QUANTITY ( PRICE)
$1,8001,7001,6001,5001,4001,3001,2001,1001,000 900 800 700 600 500 400 300 200 100 0
To
tal r
eve
nu
e a
nd
to
tal c
ost
TotalRevenue
TotalCost
MaximumEconomic
Profits$299
Break-Even Point(Normal Profit)
Break-Even Point(Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
TOTAL REVENUE-TOTAL COST APPROACH
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
Profit Maximization Position
Key Micro FormulasKey Micro Formulas
RELATIONSHIP ECONOMIC INTERPRETATION
MR = MC When MR = MC, we know that the firm has chosen the output that maximizes profits.
P > ATC Firm is earning ECONOMIC PROFITS
P = ATC Firm is earning NORMAL PROFIT (Break-Even Point) (economic profit = 0)
P < ATCP > AVC
Loss Minimization
P = AVC SHUTDOWN POINT (firm will loseTFC if they produce or Shutdown and produce 0.
P < AVC Firm does not produce
Finding the Perfectly
Competitive Firm’s Supply Curve
Finding the Perfectly
Competitive Firm’s Supply Curve
Co
st a
nd
Rev
enu
e, (
do
llar
s) MC
MR1
AVC
ATC
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run Supply
Do notProduce –
Below AVC
Co
st a
nd
Rev
enu
e, (
do
llar
s)MC
MR1
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run SupplyYields theShort-Run
Supply Curve
Supply
NoProductionBelow AVC
Long Run Equilibrium (Perfectly
Competitive Firm)
Long Run Equilibrium (Perfectly
Competitive Firm) Productive Efficiency Allocative Efficiency
P MR
Q
MCATC
Quantity
Pri
ce
Price = MC = Minimum ATC(normal profit)
LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM
How an Increase in Demand Changes
Long-Run Equilibrium for the Firm and Industry
How an Increase in Demand Changes
Long-Run Equilibrium for the Firm and Industry
Temporary Profits and the ReestablishmentOf Long-Run Equilibrium
S1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
MR
D1
An increase in demand increases profits…
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
EconomicProfits
S1
New Competitors increase supply and lowerPrices decrease economic profits
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
Zero EconomicProfits
S1
S2
How an Decrease in Demand Changes Long-Run Equilibrium for the Firm and Industry
How an Decrease in Demand Changes Long-Run Equilibrium for the Firm and Industry
Decreases in demand, Losses and the Reestablishment of Long-Run Equilibrium
S1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D1
MR
A decrease in demand creates losses…
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
EconomicLosses
S1
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
Return to ZeroEconomic Profits
S1
S3
Competitors with losses decrease supply andprices return to zero economic profits
Price and Marginal Revenue for a
Monopoly
Price and Marginal Revenue for a
Monopoly
MONOPOLY REVENUES & COSTS
Do
llar
sD
oll
ars
$200
150
200
50
$750
500
250
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
MONOPOLY REVENUES & COSTS
Do
llar
sD
oll
ars
$200
150
200
50
$750
500
250
MR
Elastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
DQ
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
TR
Q
MONOPOLY REVENUES & COSTS
Q
Do
llar
sD
oll
ars
$200
150
200
50
$750
500
250
TR
MR D
InelasticElastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Failing to remember how to shade the area of ECONOMIC PROFIT
THE PROFIT-MAXIMIZING
POSITION OF A MONOPOLY
Failing to remember how to shade the area of ECONOMIC PROFIT
THE PROFIT-MAXIMIZING
POSITION OF A MONOPOLY
Profit Maximization Under Monopoly
D
MC
ATC
MR
$94
$122Profit
MR = MC
ProfitPer Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
e
Remember the MR=MC Rule?
And the Shading of Economic Losses
LOSS MINIMIZATION OF THE IMPERFECT
COMPETITOR
And the Shading of Economic Losses
LOSS MINIMIZATION OF THE IMPERFECT
COMPETITOR
Loss Minimization Under Monopoly
D
MCATC
MR
APm
Loss
MR = MC
LossPer Unit
OUTPUT AND PRICE DETERMINATION
Q
200
175
150
125
100
75
50
25
0 1 2 3 4 5 6 7 8 9 10
Pri
ce,
cost
s, a
nd
rev
enu
e
AVC
Qm
V
Since Pm exceeds AVC,the firm will produce
Monopoly
vs.
Competition
Monopoly
vs.
Competition
PURE COMPETITION
MONOPOLY
MR = MC
The firms maximizes profit.
MR = MC
The firm maximizes profit.
P = ATC
The firms just BREAK-EVEN (NORMAL PROFITS) in the Long Run.
P > ATC
Long Run ECONOMIC PROFITS.
P = min ATC
Firm is forced to operate with maximum productive
efficiency.
--------------------------------------PRODUCTIVE EFFICIENCY (Least-Cost Method Production)
P > min ATC
Firm is not forced to operate with maximum productive efficiency.
PRODUCTIVE INEFFICIENCY
(Least-Cost Method Production not necessary)
P = MC
There is an optimal allocation of resources.
ALLOCATIVE EFFICIENCY
P > MC
There is an UNDERALLOCATION of resources.
ALLOCATIVE INEFFICIENCY
P = MR
The firm’s DEMAND CURVE is infinitely ELASTIC.
P > MR
The firm’s DEMAND CURVE is less than infinitely
ELASTIC.
Q
INEFFICIENCY OF PURE MONOPOLY
P
DMR
S = MC
Pc
Pm
QcQm
At MR=MCA monopolistwill sell less
units at ahigher price
than incompetition
An industry in pure competitionsells where supply and
demand are equal
Q
INEFFICIENCY OF PURE MONOPOLY
P
DMR
S = MC
Pc
Pm
QcQm
At MR=MCA monopolistwill sell less
units at ahigher price
than incompetition
Monopoly pricing effectivelycreates an income transfer from
buyers to the seller!
Not being able to GRAPH a Natural
Monopoly and the Socially- Optimal
Outputand
Fair-Return Output Levels
Not being able to GRAPH a Natural
Monopoly and the Socially- Optimal
Outputand
Fair-Return Output Levels
Natural MonopoliesRate RegulationSocially Optimum Price
P = MCFair-Return Price
P = ATCDilemma of Regulation
REGULATED MONOPOLY
Graphically…
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Monopoly PriceMR = MC
Qm
Pm
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Socially-OptimumPrice
P = MC
Qr
Pr
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
Fair-Return PriceNormal Profit Only
Qf
Pf
REGULATED MONOPOLY
Q
D
MR
MCATC
P
Pri
ce a
nd
Co
sts
MR = MC
Fair-Return Price
Socially-OptimumPrice
Qm Qf Qr
Dilemma of RegulationWhich Price?
Pm
Pf
Pr
Single PRICE Monopoly
vs.
Price Discrimination
Single PRICE Monopoly
vs.
Price Discrimination
ConditionsMonopoly PowerMarket SegregationNo Resale
ConsequencesMore ProfitMore Production
PRICE DISCRIMINATION
Graphically…
Q
DMR
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Economic profits witha single MR=MC
price
PRICE DISCRIMINATION
Q
D
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
PRICE DISCRIMINATION
Q2
A perfectly discriminatingmonopolist has MR=D,producing more product
and more profit!
MR=D
Q
D
MC
ATC
P
Q1
Pri
ce a
nd
Co
sts
Economic profits withprice discrimination
PRICE DISCRIMINATION
Q2
MR=D
Monopolistic Competiton
What is it?Monopoly?
Competition?
Monopolistic Competiton
What is it?Monopoly?
Competition?
D
MR
P1
ATCP
rice
an
d C
ost
s
Q1
EconomicProfits
Expect New Competitors
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A1
MC
D
MR
P1
ATCP
rice
an
d C
ost
s
Q1
EconomicProfits
Expect New Competitors
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A1
New competition drives down theprice level – leading to economic
losses in the short run
MC
D
MR
MC
P2
ATCP
rice
an
d C
ost
s
Q2
EconomicLosses
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A2
D
MR
MC
P2
ATCP
rice
an
d C
ost
s
Q2
EconomicLosses
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
A2With economic losses, firms willexit the market – Stability occurswhen economic profits are zero
D
MR
MC
P3 = A3
ATCP
rice
an
d C
ost
s
Q3
PRICE AND OUTPUT INMONOPOLISTIC COMPETITION
Quantity
Long-Run EquilibriumNormalProfitOnly
NOW,
for theRESOURCE (Factor)
MARKETS
NOW,
for theRESOURCE (Factor)
MARKETS
Remember…
Product Market:
MR = MC
Resource Market:
MRP = MFC
Remember…
Product Market:
MR = MC
Resource Market:
MRP = MFC
Units ofResource
TotalProduct(Output)
Marginalproduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
P 141210 8 6 4 2R
esou
rce
pric
e(w
age
rate
)
Quantity of resource demanded
Pure CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
01
0 7
7$2 2
$ 0 14
$ 14
Units ofResource
TotalProduct(Output)
Marginalproduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
P 141210 8 6 4 2R
esou
rce
pric
e(w
age
rate
)
Quantity of resource demanded
Pure CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
012
0 713
76
$2 2 2
$ 0 14 26
$ 14 12
Units ofResource
TotalProduct(Output)
Marginalproduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
P 141210 8 6 4 2R
esou
rce
pric
e(w
age
rate
)
Quantity of resource demanded
Pure CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
0123
0 71318
765
$2 2 2 2
$ 0 14 26 36
$ 14 12 10
Units ofResource
TotalProduct(Output)
Marginalproduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
P 141210 8 6 4 2R
esou
rce
pric
e(w
age
rate
)
Quantity of resource demanded
Pure CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
01234567
0 7131822252728
7654321
$2 2 2 2 2 2 2 2
$ 0 14 26 36 44 50 54 56
$ 14 12 10 8 6 4 2
The purely competitiveseller’s demand fora resource
Units ofResource
TotalProduct(Output)
Marginalproduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
P 141210 8 6 4 2R
esou
rce
pric
e(w
age
rate
)
Quantity of resource demanded
Pure CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
01234567
0 7131822252728
7654321
$2 2 2 2 2 2 2 2
$ 0 14 26 36 44 50 54 56
$ 14 12 10 8 6 4 2
The purely competitiveseller’s demand fora resource
Now, consider the caseof resource demand under
Imperfect Competition
Units ofResource
TotalProduct(Output)
Marginalproduct
(MP)Product
PriceTotal
Revenue
MarginalRevenue
Product (MRP)
]]]]]]
0 1 2 3 4 5 6 7 8 Q
P 141210 8 6 4 2R
esou
rce
pric
e(w
age
rate
)
Quantity of resource demanded
Imperfect CompetitionMRP AS A DEMAND SCHEDULE
]]]]]]
01234567
0 7131822252728
7654321
$2.80 2.60 2.40 2.20 2.00 1.85 1.75 1.65
$ 0 18.20 31.20 39.60 44.00 46.25 47.25 46.20
$ 18.20 13.00 8.40 4.40 2.25 1.00 -1.05
The imperfectlyCompetitive seller’sdemand for a resource
LABOR MARKETS:
Wage Determination
LABOR MARKETS:
Wage Determination
PURELY COMPETITIVELABOR MARKET
Purely competitive labor market:
Many Firms
Numerous Qualified Workers
“Wage Taker” Behavior
Market Demand for Labor
Market Supply of Labor
Non-LaborCosts
LaborCosts
LABOR SUPPLY AND DEMANDPURELY COMPETITIVE MARKET
Labor Market
S
D = MRP( mrp’s)
Wc
(1000)
Individual Firm
S = MRC
d = mrp
Wc
Quantity of Labor
Wa
ge
Ra
te (
do
llars
)
Quantity of Labor
($10)
(5)
$10 $10 $10 $10 $10 $10
IncludesNormalProfit
Wa
ge
Ra
te (
do
llars
)S
Quantity of Labor
MONOPSONISTICLABOR MARKET
In monopsonyMRC lies abovethe supply curve
Wa
ge
Ra
te (
do
llars
)
MRP
S
Wm
Quantity of Labor
MRC
Qm
MONOPSONISTICLABOR MARKET
MRP = MRC
Qm units oflabor hired
Wa
ge
Ra
te (
do
llars
)
MRP
S
Wm
Quantity of Labor
MRC
Wc
Qm Qc
The competitivesolution would
result in a higherwage and greater
employment
MONOPSONISTICLABOR MARKET
EXTERNALITIES
Negative
Positive
EXTERNALITIES
Negative
Positive
COST-BENEFIT ANALYSIS
Marginal Cost = Marginal Benefit Rule
Spillover Costs
Overallocation
Spillover BenefitsUnderallocation
Externalities
P
Q
SPILLOVER COSTS AND BENEFITSIllustrating a Negative Externality
D
0
Spillovercosts
St
S
Overallocation
Q0 Qe
P
Q
SPILLOVER COSTS AND BENEFITSIllustrating a Positive Externality
0 Qe Q0
D
Dt
SpilloverBenefits
St
Underallocation
Taxation ConceptsTaxation Concepts
APPORTIONING THE
TAX BURDENBenefits-Received Principle
Ability-to-Pay Principle
• Progressive Tax
• Regressive Tax
• Proportional Tax
TAX APPLICATIONS:
• Personal Income TaxProgressive
• Sales TaxRegressive
• Corporate Income TaxProportional - Regressive
• Payroll TaxesRegressive
• Property TaxesRegressive
Identify whether progressive, regressive, or proportional
Price Supports SurplusesSubsidies
Price Supports SurplusesSubsidies
EFFECT OF PRICE SUPPORTS
Pe
D
S
QeQc Qs
Surplus
Ps
Surplus beingcreated by thesubsidies
Q
P
Price SupportLevel
International TradeInternational Trade Comparative Advantage
Case for Free Trade
Export Supply
Import Demand
Total output will be greatest whenEach good is produced by the nationthat has the lowest domesticopportunity cost for that good.
U.S has comparative advantage in wheat
Brazil has comparative advantage in coffee
Principle of Comparative Advantage
PRODUCTION POSSIBILITIES
Terms of Trade
Gains From TradeImproved Options
Principle of Comparative Advantage
PRODUCTION POSSIBILITIES
Trading Possibilities Line
Graphically…
PRODUCTION POSSIBILITIES
A
B
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
Wheat (tons) Wheat (tons)
Curve For Each CountryUnited States Brazil
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
A’
B’
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
TRADING POSSIBILITIES LINES
Co
ffee
(to
ns)
Co
ffee
(to
ns)
45
40
35
30
25
20
15
10
5
0
30
25
20
15 10 5
05 10 15 20 25 30 5 10 15 20
A
B
Tradingpossibilities line
Tradingpossibilities line
A’
B’
Wheat (tons) Wheat (tons)
The Gains from TradeUnited States Brazil
The Case ForFree Trade
U.S. EXPORT SUPPLYAND IMPORT DEMAND
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
Dd
Sd
If the world priceexceeds the U.S.
price by 25 cents...
$1.50
1.25
1.00
.75
.50
.25Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150Quantity of Aluminum
10050P
rice
(p
er p
ou
nd
; U
.S. d
olla
rs)
$1.50
1.25
1.00
.75
.50
.25
Quantity of Aluminum
EXPORTS = 50
U.S. EXPORT SUPPLYAND IMPORT DEMAND
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
$1.50
1.25
1.00
.75
.50
.25
If the world pricegoes further up...
Sd
Quantity of Aluminum Quantity of Aluminum
EXPORTS = 50
EXPORTS = 100
U.S. EXPORT SUPPLYAND IMPORT DEMAND
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100 $1.50
1.25
1.00
.75
.50
.25
If world pricesfall below $1.00...
Sd
U.S.exportsupply
Quantity of Aluminum Quantity of Aluminum
SHORTAGE = 50
U.S. EXPORT SUPPLYAND IMPORT DEMAND
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100 $1.50
1.25
1.00
.75
.50
.25
Sd
EXPORTS = 50
EXPORTS = 100
IMPORTS = 50
U.S.exportsupply
Quantity of Aluminum Quantity of Aluminum
SHORTAGE = 50
SHORTAGE = 100
U.S. EXPORT SUPPLYAND IMPORT DEMAND
U.S. DomesticAluminum Market
U.S. Export SupplyAnd Import Demand
$1.50
1.25
1.00
.75
.50
.25
10050
DdPri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 50
SURPLUS = 100
U.S.exportsupply
EXPORTS = 50
EXPORTS = 100
IMPORTS = 50
IMPORTS = 100
U.S.import
demand
$1.50
1.25
1.00
.75
.50
.25
Sd
Quantity of Aluminum Quantity of Aluminum
CANADIAN EXPORT SUPPLYAND IMPORT DEMANDCanada’s DomesticAluminum Market
Canada’s Export SupplyAnd Import Demand
DdSHORTAGE = 50
$1.50
1.25
1.00
.75
.50
.25
10050
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
Pri
ce (
per
po
un
d;
U.S
. do
llars
)
10050 75 125150
SURPLUS = 100
Canadianexportsupply
Canadianimport
demand
$1.50
1.25
1.00
.75
.50
.25
Sd
SURPLUS = 50
Quantity of Aluminum Quantity of Aluminum
EQUILIBRIUM WORLD PRICE ANDQUANTITY OF EXPORTS & IMPORTS
Pri
ce (
per
po
un
d;
U.S
. d
oll
ars)
U.S. exportsupply
U.S. importdemand
Quantity of Aluminum
Canadianexportsupply
Canadian importdemand
10050
$1.50
1.25
1.00
.75
.50
.25
25
.88 Equilibrium
