Question

What is an export supply curve? What is an import demand curve? How do such curves relate to the determination of the equilibrium world price of a tradable good?

Short answer

Export supply and import demand curves intersect to determine the equilibrium world price of a tradable good.

Step-by-step solution

Understanding the Export Supply Curve

The export supply curve represents the relationship between the quantity of a good that domestic producers are willing to export and the price of that good. As the world price increases, domestic producers are usually willing to supply more to the international market because they can earn more revenue.

Understanding the Import Demand Curve

The import demand curve represents the relationship between the quantity of a good that domestic consumers want to import and the price of that good. As the world price decreases, domestic consumers are generally willing to import more because the good becomes cheaper relative to domestic alternatives.

Finding the Equilibrium World Price

The equilibrium world price is determined at the point where the export supply and import demand curves intersect. At this point, the quantity of the good that producers wish to export equals the quantity that consumers wish to import, balancing international trade.

Key concepts

Understanding the Export Supply Curve

An export supply curve visually represents how the quantity of a good supplied for export by domestic producers changes with varying prices. It's essentially a graphical line that depicts the willingness of producers to sell overseas at different price points. When the global market price of a product rises, producers have a greater incentive to sell more abroad due to the higher revenue potential.

• This curve slopes upwards because higher prices increase the quantity supplied.
• It reflects producer behavior, showing responsiveness to price changes.
• When prices are low, producers might opt to sell more domestically.

For instance, consider a country that produces wheat. If the international price of wheat rises due to increased demand from another country facing a shortage, domestic producers in the exporting country will likely boost their shipments abroad to take advantage of higher selling prices. This increase in quantity shows up on the upward sloping export supply curve.

Understanding the Import Demand Curve

The import demand curve is crucial in understanding how a country determines its need for foreign goods at varying price levels. Essentially, it represents the relationship between the price of a good and the quantity that consumers within a country are willing to import.

• The curve slopes downward, indicating increased import demand as prices fall.
• It highlights consumer behavior and sensitivity to price fluctuations.
• Lower price points make imported goods more attractive than local products.

Imagine a country that needs to import oil. If the global price of oil drops because of increased supply from producing countries, domestic buyers find importing more economical compared to relying solely on domestic sources. This situation would be evident on the downward sloping import demand curve, where lower prices encourage greater demand for foreign products.

Determining the Equilibrium World Price

The concept of equilibrium world price is central to international trade as it represents the price point where the global market efficiently clears the supply and demand for a product. This equilibrium price is found at the intersection of the export supply and import demand curves.

• It balances international trade by equating supply from exporters with demand from importers.
• Serves as the global market's consensus price for a traded good.
• Fluctuations in this price signal potential changes in market conditions or global shifts in supply and demand.

At equilibrium, the quantity that exporters want to supply is exactly matched by the quantity that importers need, which ensures stable trade relations. For example, in the market for consumer electronics, if demand in importing countries rises due to technological advances, the equilibrium price might increase, indicating higher market prices and prompting exporters to supply more until balance is restored.