Years ago, an apple producer argued that the United States should enact a tariff, or a tax, on imports of bananas. His reasoning was that "the enormous imports of cheap bananas into the United States tend to curtail the domestic consumption of fresh fruits produced in the United States." a. Was the apple producer assuming that apples and bananas are substitutes or complements? Briefly explain. b. If a tariff on bananas acts as an increase in the cost of supplying bananas in the United States, use two demand and supply graphs to show the effects of the apple producer's proposal. One graph should show the effect on the banana market in the United States, and the other graph should show the effect on the apple market in the United States. Be sure to label the change in equilibrium price and quantity in each market and any shifts in the demand and supply curves.

Step by step solution

01

Identify Relationship Between Products

From the producer's statement that import of cheap bananas reduces consumption of domestic fresh fruits, it can be inferred that the producer considered apples and bananas as substitutes. This is because increased consumption of one leads to decreased consumption of the other.

02

Impact of Tariff on Banana Market

A tariff on banana imports would make bananas more expensive in the United States. This can be represented in a supply and demand graph. The supply curve would shift to the left, representing decrease in supply due to increase in cost. Consequently, this would lead to an increase in the equilibrium price of bananas and decrease in quantity demanded as shown by the new intersection of the demand and supply curves.

03

Impact on Apple Market

An increase in banana prices due to tariff could shift the demand curve for apples to the right, as they are substitutes for bananas, i.e., consumers would buy more apples if bananas are expensive. This would lead to an increase in the equilibrium price and quantity of apples as depicted by the new intersection of the demand and supply curves.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Tariffs and trade policy

In economics education, understanding the impact of tariffs on trade policy is crucial. Tariffs are taxes imposed on imported goods and are usually designed to protect domestic industries from foreign competition. In our exercise, an apple producer advocates for tariffs on bananas, believing it would decrease the consumption of imported bananas and increase the demand for domestic apples.

Adding a tariff on bananas makes them more expensive for consumers, effectively reducing their affordability. This lessens the quantity of bananas sold in the U.S. market and could potentially boost the sale of substitutes, in this case, apples. However, it's critical to note that tariffs can also lead to trade wars and may have broader implications for the economy, including potential price increases on domestic goods and retaliation from other countries.

Substitutes and complements

Substitutes and complements are two fundamental concepts related to how products interact in the market. Substitutes are different products that satisfy similar consumer needs or desires, such as apples and bananas in our example. If the price of bananas increases due to a tariff, consumers might turn to apples as an alternative, reflecting the substitutive relationship between the two.

Complements, on the other hand, are products often used together, like peanut butter and jelly. A change in the price of a complementary good affects the demand for its pair. It's essential for students to differentiate between these relationships, as they critically influence consumer behavior and market dynamics.

Market equilibrium

Market equilibrium is the state in which the quantity of goods supplied equals the quantity of goods demanded, leading to a stable market price. It occurs at the intersection of the supply and demand curves on a graph. In the given scenario, imposing a tariff disrupts the equilibrium by reducing supply and altering demand. For bananas, the equilibrium shifts to reflect higher prices and lower quantity. Conversely, the apple market sees an increase in both price and quantity as equilibrium adjusts to greater demand for apples. Understanding market equilibrium helps students grasp how market forces interact to allocate resources efficiently and how policy changes can disrupt this balance.

Demand and supply graph analysis

The demand and supply graph is a foundational tool in economics that illustrates how demand and supply interact to determine prices and quantities in a market. In our apple and banana markets, graph analysis clarifies the consequences of a tariff. An increase in the cost of bananas, as represented on the graph, causes a leftward shift in the supply curve, signaling decreased supply. At the same time, the demand curve for apples shifts rightward as they become a more attractive alternative. Through graph analysis, the exercise visually represents the changes in equilibrium price and quantity, reinforcing the lesson that market outcomes are the result of the continuous interplay of supply and demand factors.