3 Surplus Consumer Surplus Market Consumer Surplus Producer Surplus Market Producer Surplus Maximum willingness to pay Amount actually paid Area below the demand curve above the equilibrium market price Market price Minimum acceptable price Area above the supply curve above the equilibrium market price Efficiency Total benefits maximized Consumer Surplus Producer Surplus If total benefits are not maximized there exists some change for which gains to gainers losses to losers Exists a PPI and PI when a side payment occurs Inefficient unless we exploit that change Partial Equilibrium Model of Trade 2 Critical Assumptions 1 Roughly competitive Market 2 Relatively low transportation cost as a fraction of production cost Simplifying assumptions 1 Two countries US ROW Rest of World 2 Same monetary unit USD 3 Perfect competition a Many buyers and sellers so no one of them can influence price b Easy entry exit c Easy access to information d Standardized product 4 Zero transportation costs other than that that would be incurred without trade transportation internationally Autarky Self sufficiency when country does not do international trade ROW If people import from ROW price increases Curve doesn t shift it just a movement along the curve US As people import to US price drops movement along the curve Same distance between SS and DD of ROW and that of USA Export Import Triangles above the US imports and ROW exports line is the deadweight loss from autarky potential gains not realized from trade Conclusions 1 Each country as a whole gains from trade 2 Trade redistributes benefits within each country 3 Within each country gains to gainers losses to losers 4 There exists a side payment within each country that could make trade a PI with 4 entities 5 Logical oppositions to trade requires a Model does not capture all relevant gains and losses from trade b Side payments wont occur and losses matter 3 Surplus