2 Assume that imports increase supply In terms of demand sup

2. Assume that imports increase supply. In terms of demand, supply and consumer surplus, why would consumers prefer more imports?
3. Assume that exports increase demand. In terms of demand, supply and producer surplus, why would producers prefer more exports?
4. Adam Smith studied a pin factory and found that 1 individual doing all tasks necessary to make a pin could only make several pins per day. Specialization among tasks in the factory, however, resulted in each person doing only one thing and the number of pins produced per worker increased to thousands of pins per day. He then wrote a book called The Wealth of Nations which was about specialization and trade. Do you think citizens in closed economies (e.g., North Korea or the old Soviet Union) that do everything for themselves, including things they are not very good at or that involve resources they do not have, and do not trade or compete are better off than citizens in competitive market economies that specialize and engage in international trade?

Solution

(2)

If imports increase supply, then due to higher supply, the supply curve will shift right and price will fall. Consumer surplus is the area between demand curve and equilibrium price. So, the lower the equilibrium price, the higher the consumer surplus, which is beneficial for the consumers because the difference between the maximum price they are willing to pay and the price they actially pay is higher. That\'s why consumers will prefer more imports.

(3)

If exports increase demand, there is an increase in demand which shifts the demand curve up. Higher demand will increase the equilibrium price. Producer surplus is the area between supply curve and equilibrium price, so the higher the equilibrium price, the higher the producer surplus, because the difference between the minimum price at which producers are willing to sell and the price they actually receive (equilibrium price) increases, which is beneficial for producers. That\'s why, producers prefer more exports.

NOTE: Out of 3 questions, the first 2 are answered.