Question

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVs?

Short answer

In conclusion, using the four-step analysis for the market of imported flat screen TVs in the United States, a reduction in tariff will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity. The cost of production for suppliers will decrease with the tariff cut, resulting in an outward (rightward) shift in the supply curve. This new equilibrium will be reached at a lower price and higher quantity due to the interaction between the demand curve and the new supply curve after the tariff reduction.

Step-by-step solution

Identify the affected market

In this case, the affected market is the market for imported flat screen televisions in the United States. The U.S. government has decided to cut the tariff on these products, which will have an impact on the equilibrium price and quantity.

Analyze the demand and supply curves

The demand curve for flat screen TVs shows the relationship between the quantity demanded by consumers and the price of the product. The law of demand states that as the price of a product increases, the quantity demanded decreases, and vice versa. The supply curve of imported flat screen TVs shows the relationship between the quantity supplied by producers and the price of the product. The law of supply states that as the price of a product increases, the quantity supplied increases, and vice versa. A tariff functions as a tax on the imported goods, which effectively increases the cost of production for suppliers. As a result, the supply curve for imported flat screen TVs will shift inward (to the left) when a tariff is imposed, leading to a higher price and lower quantity supplied.

Determine the impact of the tariff reduction

When the U.S. government cuts the tariff on imported flat screen televisions, the cost of production for suppliers will decrease. This will result in an outward (rightward) shift in the supply curve for imported flat screen TVs. As the supply curve shifts to the right, the equilibrium price will decrease, and the equilibrium quantity will increase.

Describe the new equilibrium

After the tariff reduction, the market for imported flat screen TVs will reach a new equilibrium point at a lower price and higher quantity. This is because the decreased cost of production for suppliers leads to an increase in the quantity of flat screen TVs supplied at each price point. As a result, the demand curve intersects the new supply curve at a lower price and higher quantity than before. In conclusion, the reduction in the tariff on imported flat screen televisions will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity of flat screen TVs in the market.

Key concepts

Tariff Reduction Analysis

Understanding the impact of a tariff reduction begins with realizing how tariffs function within the marketplace. A tariff is like a gatekeeper's fee; importers must pay to bring their goods into a country, making the products costlier and less competitive against similar domestically produced items. This fee can discourage imports, therefore, when a government decides to reduce the tariff, as in the case of the U.S. government cutting the tariff on imported flat screen televisions, the effects ripple through the market.

With a lower tariff, the cost for importers drops, allowing them to reduce prices and still maintain their profit margins. This reduction can make imported flat screen TVs more attractive to consumers, leading to a potential increase in consumer demand. Suppliers, on the other hand, find it more beneficial to manufacture and export their goods due to reduced costs, which boosts the quantity they are willing to supply. As a result, the tariff reduction lowers prices and increases the availability of imported flat screen TVs in the market, ultimately affecting the equilibrium price and quantity of these products. The four-step analysis in the exercise is aimed at depicting this change holistically.

Demand and Supply Curves

To provide a clear visual representation of economic transactions, economists use demand and supply curves. These curves graphically illustrate how much of a good or service is desired by consumers at various price points (demand), and the amount producers are prepared to supply (supply).

The slope of the demand curve typically trends downward, indicating that as prices fall, consumers will want to purchase more, in accordance with the law of demand. In contrast, the supply curve typically has an upward trajectory, showing that higher prices incentivize producers to increase supply, as stated by the law of supply.

Understanding Shifts in Curves

When the tariff on an imported good is cut, the supply curve shifts to the right, representing a larger quantity supplied at every price point. This shift can be attributed to the reduced production costs associated with lower tariffs. The demand curve, conversely, remains stable in this scenario, as the change in tariff directly influences production costs rather than consumers' willingness to pay. However, a resultant decrease in price from the increased supply can lead to movement along the demand curve, where consumers are now ready to buy more at the new lower prices.

Market Equilibrium After Tariff Cut

Market equilibrium is achieved when the quantity of a product that consumers are willing to buy equals the quantity that producers are willing to sell, hence the intersection of the demand and supply curves. After the tariff on imported flat screen TVs is reduced, we are likely to see a change in market equilibrium. This involves finding a new point where the supply and demand curves intersect due to alterations in these curves.

A tariff cut leads to a rightward shift of the supply curve, which creates a new intersection point with the demand curve. This new equilibrium signifies a higher equilibrium quantity and a lower equilibrium price compared to the previous state where the tariff was higher. Consumers benefit from the lower prices and the increased availability of the product. Producers, while receiving less revenue per unit, might find that the increased volume of sales can compensate for the price drop.

In summary, when a tariff on a product like imported flat screen TVs is reduced, the subsequent market adjustments, in terms of the supply curve shift, equilibrate at a point of higher quantity and lower price, reflecting an increased efficiency in the market and better accessibility for consumers.