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.) $$\begin{array}{ccc}\hline \text { Price } & \text { Quantity Supplied } & \text { Quantity Demanded } \\ \hline 0 & 0 & 160 \\\2 & 20 & 140 \\\4 & 40 & 120 \\\6 & 60 & 100 \\\8 & 80 & 80 \\\10 & 100 & 60 \\ 12 & 120 & 40 \\\\\hline\end{array}$$ 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

The equilibrium price is €8, with a quantity of 80 million lbs. With a world price of €2, EU suppliers will provide 20 million lbs and meat consumers will demand 140 million lbs. There will be a need to import 120 million lbs to meet this demand. When trade opens, consumers in the European Union benefit, while producers lose out due to the lower world price.

Step-by-step solution

Find the equilibrium price and quantity

Equilibrium occurs when quantity supplied equals quantity demanded. Look for the price at which the quantity supplied and quantity demanded are the same. In this case, that occurs at €8 where 80 million pounds of beef are both supplied and demanded. Hence, the equilibrium price is €8 and the equilibrium quantity is 80 million pounds.

Compute the supply and demand with world price

When the world price is €2, refer to the table to find out how much EU producers will supply, and how much EU consumers will demand. At €2, EU producers will supply 20 million pounds, while EU consumers will demand 140 million pounds.

Calculate for import quantity

Import is calculated as the difference between quantity demanded and quantity supplied. Import = Demand - Supply. Thus, the EU will import 120 million pounds (140 million pounds - 20 million pounds) to satisfy demand.

Identify the winners and losers when trade opens up

When trade opens up, consumers who can now buy beef at a lower price will gain. The decrease in price will also increase consumer demand. EU producers will however lose, since the world price is lower than the equilibrium price, they will be forced to reduce their selling price, and thus their earnings will reduce.