ECON 1116 3 DecemberLabor supply: an increase in W- Income effect of wage change:o With higher wage, individual’s income and purchasing power increase, so he is richero 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 dominateso Substitution effect causes labor supply upward-sloping (typical)o Income effect causes labor supply downward-sloping - Market labor supplyo Market labor supply curve is horizontal sum of individual labor supplycurveso Movements along the market labor supply curve Change in wage, Wo 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 marketInternational Trade- Autarky describes a situation where a country doesn’t trade with other countries- Why don’t all countries produce and trade in autarky?o Richardian modelo Opportunity cost—absolute and comparative advantage- Sources of comparative advantageo Differences across countries in Climate- Some output goods are easier to grow or breed under (ifnot require) certain environmental conditions- Ex: shrimp in Vietnam Factor endowments- Hecksher-Ohlin trade modelo 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 TechnologyECON 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 priceo The terms of clothing/food exchange with trade will fall between “exchange rates” (i.e., opportunity costs) across countries in autarkyo See example in powerpointo There will be increased production and consumption opportunities when trade is exercisedo Trade improves efficiency, but it’s not necessarily equitable—some 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 tradeo 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 productiono 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 modelo Gains from trade Case 1: low world price- Domestic demand cross domestic supply gives price andquantity 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 gainin 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 adjustso 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 surplusECON 1116 3 December- Trade taxes - Quotas- Consumption taxes/subsidies- Production
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