ECON 1116 3 December Labor supply an increase in W Income effect of wage change o With higher wage individual s income and purchasing power increase so he is richer o Since leisure is a normal good leisure increases and labor decreases Substitution effect of wage change o With higher wage opportunity cost of consuming leisure is greater i e price of leisure has increased leisure time more expensive o Leisure decreases labor increases Slope of labor supply depends on which effect dominates o Substitution effect causes labor supply upward sloping typical o Income effect causes labor supply downward sloping Market labor supply curves o Market labor supply curve is horizontal sum of individual labor supply o Movements along the market labor supply curve Change in wage W o Shift of market labor supply curve Change in preferences tastes for any given person Alter utility function Change in income and or prices of market goods for any given person Change in number of people in market International Trade countries Autarky describes a situation where a country doesn t trade with other Why don t all countries produce and trade in autarky o Richardian model o Opportunity cost absolute and comparative advantage Sources of comparative advantage o Differences across countries in Climate Some output goods are easier to grow or breed under if not require certain environmental conditions Ex shrimp in Vietnam Factor endowments Hecksher Ohlin trade model o Countries will have comparative advantage in output of a good whose production in intensive in factors that are abundant in that country compared to other countries Ex clothing in China Technology ECON 1116 3 December Goods that country will specialize in and produce depends on terms of trade How will world production be organized o Producers in each country respond to incentives provided by the market Terms of trade world trade price o The terms of clothing food exchange with trade will fall between exchange rates i e opportunity costs across countries in autarky o See example in powerpoint o There will be increased production and consumption opportunities o Trade improves efficiency but it s not necessarily equitable some when trade is exercised consumers may be worse off Allocation of gains form trade and how much each country produces of each good will depend on the terms of trade o PPF is not linear when including both countries it s bowed out The world PPF without trade is linear Final point of Ricardian Model terms of trade and production o Allocation of gains from trade and how much each country produces of each good will depend on the terms of trade International trade and policy with the supply and demand model o Gains from trade Case 1 low world price Domestic demand cross domestic supply gives price and quantity in autarky P world is below P autarky and market supply is domestic until it hits P world horizontal at this price Import with low world price Consumers gain from this trade and there is a net gain in social surplus Case 2 high world price P world is above P autarky Market demand follows domestic demand above p world and is perfectly elastic at p world Export with high world price above autarky price Producers gain from this trade and there is a net gain in social surplus Domestic demand and domestic supply need not be equal Trade adjusts resource allocation on two margins Consumption adjusts Production adjusts o Efficiency Free trade ensures efficient allocation of resources MV soc MC soc P world Social surplus maximized Any distortion will result in reduction in social surplus ECON 1116 3 December Trade taxes Quotas Consumption taxes subsidies Production taxes subsidies
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