Question

The following table provides hypothetical data about the supply and demand for beef in the European Union. The prices are in euros, and quantities are millions of pounds of beef per month. (You may wish to draw the supply and demand curves to help you visualize what is happening.) $$\begin{array}{ccc}\text { Price } & \text { Quantity Supplied } & \text { Quantity Demanded } \\\\\hline 0 & 0 & 160 \\\2 & 20 & 140 \\\4 & 40 & 120 \\\6 & 60 & 100 \\\8 & 80 & 80 \\\10 & 100 & 60 \\\12 & 120 & 40\end{array}$$ a. In the absence of international trade, what is the equilibrium price and quantity of beef? b. If trade opens up, and the world price of beef is (and remains) 2 euros per pound of beef, how much beef will EU producers supply? How much beef will EU consumers demand? How much beef will be imported? c. Within the EU, who gains and who loses when trade opens up?

Short answer

a. The equilibrium price under no trade is 8 euros, and the equilibrium quantity is 80 million pounds. b. At a world price of 2 euros, EU producers will supply 20 million pounds, EU consumers will demand 140 million pounds, and 120 million pounds will have to be imported. c. EU consumers gain and EU producers lose when trade opens up.

Step-by-step solution

Find the equilibrium price and quantity

The equilibrium is the point where demand equals supply. To find out, let's analyze the table. It is here we see that the quantity supplied equals the quantity demanded when the price is 8 euros. Therefore, the equilibrium price is 8 euros, and the equilibrium quantity is 80 million pounds per month.

Determine the supply and demand at the world price level

Next, we need to find out how much beef EU producers will supply and EU consumers will demand when the world price is set at 2 euros. If we look at the table for the price of 2 euros, we find that EU will supply 20 million pounds, and will demand 140 million pounds per month.

Calculate the import quantity

The quantity of beef to be imported is the difference between the amount demanded by EU consumers and the amount supplied by EU producers. Using the demand and supply quantities that we found in step 2 (140 million pounds and 20 million pounds, respectively), we calculate the import quantity to be 140 - 20 = 120 million pounds per month.

Interpret the effects of trade

When trade with the international market opens up and the EU can purchase beef at a lower price, EU consumers will benefit because they can buy more beef for the same amount of money, this is a gain for consumers. Producers on the other hand, will lose because they are forced to lower their prices in order to compete on the market. Therefore, with the opening of trade, EU consumers gain and EU producers lose.

Key concepts

Supply and Demand Analysis

Understanding how the equilibrium price and quantity of a good, such as beef in the EU, are determined requires a grasp of supply and demand analysis. Essentially, this involves plotting supply and demand curves on a graph with price on the vertical axis and quantity on the horizontal axis.

The supply curve slopes upward since higher prices incentivize producers to supply more, reflecting their willingness to produce additional units at higher prices. Conversely, the demand curve slopes downward because consumers will purchase less as prices rise. The equilibrium price, often termed the 'market-clearing' price, is the price at which the quantity supplied equals the quantity demanded. This point where the two curves intersect represents a stable state where there is no excess supply or shortage.

In the case of beef in the EU, analyzing the table provided reveals that the equilibrium is reached at 8 euros per pound, indicating that at this price, producers are willing to supply exactly as much beef as consumers are willing to purchase. This simplified model is a fundamental concept in economics and forms the foundation for understanding how prices are determined in a free market.

International Trade Impact on Markets

The introduction of international trade can significantly influence the dynamics of supply and demand within a market. Notably, it introduces the concept of a world price, which is the price at which a good can be bought or sold on the international market.

In scenarios where the world price diverges from the domestic equilibrium price, there can be profound effects on domestic markets. If the world price is lower than the domestic price, as in the EU beef example, domestic consumers can purchase the good at a cheaper rate, leading to increased demand. This can result in a surplus of imports to meet the additional demand at the lower price.

Conversely, if the world price is higher, domestic producers can sell their goods at better rates on the international market, possibly leading to an export surplus. In either case, the introduction of international trade forces domestic prices to adjust, aligning with global market conditions and often leading to a redistribution of economic welfare between consumers and producers.

Consumer and Producer Surplus

Consumer and producer surplus are two key concepts that measure the benefits received by consumers and producers participating in a market. Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount they actually do pay. Simply put, it is the economic benefit consumers receive when they purchase a good for less than the highest price they would be willing to pay.

Producer surplus, on the other hand, is the difference between the amount producers are willing to accept for selling their goods and the amount they actually receive. It represents the benefit producers gain by selling at a market price that is higher than their minimum acceptable price.

When international trade is introduced, these surpluses can shift significantly. In the scenario where trade allows for the EU to import beef at a lower price, the consumer surplus expands as consumers enjoy lower prices. The producer surplus in the EU, conversely, is likely to decrease because producers receive a lower price than they would in the absence of trade. Understanding these concepts is pivotal for evaluating the economic impact of market changes and policy decisions on different groups within the economy.