Chapter 34: Problem 1

Explain how a tariff reduction causes an increase in the equilibrium quantity of imports and a decrease in the equilibrium price. Hint: Consider the Work It Out "Effects of Trade Barriers."

Short Answer

Expert verified

A tariff reduction results in a decrease in the tax on imported goods, lowering the cost of imports to foreign suppliers. This makes them more inclined to supply the good at various prices, leading the supply curve to shift downward. As the supply curve moves, the equilibrium price decreases, and the equilibrium quantity increases. The effect of a tariff reduction is an increase in the equilibrium quantity of imports and a decrease in the equilibrium price.

Step by step solution

1. Introducing the concept of tariffs

A tariff is a tax imposed by the government on imported goods and services. This tax increases the cost to import the product and discourages the consumption of imported goods, protecting domestic producers from foreign competition. Now that we have introduced the concept of a tariff, we can look at how a reduction in tariffs will impact the market.

2. Understanding supply and demand

In a market, supply and demand interact to determine the price and quantity of a good. Suppliers will be more interested in selling at higher prices, which is why the supply curve slopes upward. On the other hand, consumers prefer lower prices, which is why the demand curve slopes downward. The intersection point of these two curves gives us the equilibrium price and quantity in the market.

3. Explaining the effect of a tariff on the supply curve

When a tariff is imposed, it raises the cost of supplying imported goods. The quantity of imports that foreign suppliers are willing to provide at each price level decreases. This shift in the supply curve of imports causes the overall supply curve to move upward. As the supply curve shifts upward, the equilibrium price increases and the equilibrium quantity decreases.

4. Analyzing the effect of a tariff reduction

A tariff reduction means that the tax on imported goods is decreased. With the reduction in tariff, the cost of imports to foreign suppliers is now lower, making them more willing to supply the good at various price levels. This causes the supply curve to shift back downward towards its original position. As the supply curve shifts, the equilibrium price decreases, and the equilibrium quantity increases.

5. Interpreting the results

A reduction in tariffs affects the market for a good in two primary ways. Firstly, the equilibrium quantity of imports will increase because foreign suppliers are willing to supply more goods at each price level as the cost of importing decreases. Secondly, the equilibrium price will decrease as the overall supply curve shifts downward due to the increased supply of imported goods. This results in a higher equilibrium quantity of imported goods being consumed in the market at a lower price. By walking through these steps, students can better understand the complex relationship between tariffs, imports, and equilibrium prices and quantities in the market.