Chapter 20: 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 leads to an increase in the equilibrium quantity of imports and a decrease in the equilibrium price. This occurs due to the reduced cost of imported goods, which increases demand for these goods and prompts an adjustment in the market price. Lower tariffs encourage consumers to purchase more imports as their prices decrease, leading to a higher quantity of imports demanded. As a result, the market equilibrium shifts due to changes in supply and demand, causing the equilibrium price to decrease.

Step by step solution

1. Understand the concepts of equilibrium, tariffs, and supply and demand

Equilibrium is a state in the market when the demand for a product equals its supply. Supply and demand are the driving forces that determine the market price and quantity of products exchanged. A tariff is a tax imposed on imported goods, which raises the cost of these goods and affects the supply and demand balance in the market. Tariffs act as a barrier to trade and usually result in reduced imports and higher domestic prices.

2. Analyze the effect of a tariff on supply, demand, and equilibrium

When a tariff is imposed on imported goods, their price increases due to the added tax. This leads to a decrease in the demand for imported goods, as consumers look for cheaper alternatives. On the supply side, domestic producers may increase their production as the higher prices make their goods more competitive. This shift in supply and demand causes the market equilibrium for imports to change.

3. Break down the effect of a tariff reduction on the equilibrium quantity of imports

When a tariff is reduced, the price of imported goods decreases because the tax imposed on them is lower. As a result, the demand for these goods will increase, leading to a higher quantity of imports demanded. Simultaneously, the decrease in price may cause domestic producers to reduce their production, as they face stiffer competition from cheaper imports. Overall, the equilibrium quantity of imports in the market increases due to the tariff reduction.

4. Break down the effect of a tariff reduction on the equilibrium price

The reduction in the tariff on imported goods leads to lower prices for these imports. As the demand for these goods increases, consumers will be more likely to purchase them even if the domestic supply decreases. Since the market equilibrium depends on the interaction between supply and demand, a reduction in price resulting from a decrease in tariffs prompts an adjustment of the equilibrium price to a lower level.

5. Conclusion

A tariff reduction leads to an increase in the equilibrium quantity of imports and a decrease in the equilibrium price in the market. This is due to changes in supply and demand occurring as a result of the reduced cost of imported goods. Lower tariffs encourage consumers to purchase more imports as their prices decrease, and, as a consequence, the market price adjusts to the increased demand.