- What will happen to the price of a protected good after a quota?
A. It will rise.
B. It will fall.
C. Depending on inflation, it may rise or fall.
D. There will be no change in price.
E. None of the above. - What is the difference between a quota and a tariff?
A. Tariffs limit supply while quotas create revenue for the government.
B. Quotas limit supply while tariffs create revenue for the government.
C. There is no difference between quotas and tariffs.
D. Tariffs are used only with durable goods; quotas are used with all goods.
E. Both A and D
Mini-Review Answers
- D. Tariffs increase the demand for domestic goods because people substitute the foreign (more expensive) good
for the domestic good. International firms are forced to increase their prices because of an increase in taxes. This
increase in price decreases their quantity demand and shifts the domestic firms’ demand curve to the right, thus
triggering a higher price. - A.The price of a protected good after a quota will rise because the supply of that good will be limited in the
economy. Anytime a good is limited in quantity, chances are the price of that product will rise because it will
become rarer. - B.Quotas are designed to limit supply while tariffs are designed to limit supply and increase revenue for the
government. Today, the use of tariffs and quotas is discouraged because of the emphasis on free trade. The lower
the trade barriers, the higher the chance of trade between countries.
Equilibrium World Price
Think of the world as a box of sand. The sand symbolizes all the goods and services available. When there is more sand
available in one area than another, the sand comes at a cheaper price. If we were to examine a location in the sandbox
that had little sand available, then the price of sand would rise. This is much like the supply and demand for goods and
services on an international scale. When the world has too much of a good in supply—meaning too many countries can
easily produce a particular good—the country/countries producing that good cannot command a high international value.
But if we are talking about something that is produced by only a handful of countries, like oil, then those countries have
a good amount of control over their prices because of high demand.
When the world is open to trade, the many forces or factors that affect supply and demand can be seen and understood.
To simplify our discussion, let’s include only two countries in our explanation. International equilibrium occurs for
these two countries when supply and demand intersect. One nation’s import demand curve has to intersect the other
nation’s export supply curve for an international equilibrium to exist. At the point where the two curves intersect, the
import demand curve and the export supply curve, we have a world market price. This world market price (between the
two countries we are examining) is the prevailing price for the good. Both countries have agreed to this price through
their supply and demand. After trade occurs, this world price still prevails due to the involvement of other countries.
Exchange Rates
Currency exchangeis used by nations to pay for goods and services. The value of currency fluctuates as imports and
exports are shifted and as world equilibrium shifts. The dollar, for example, is relatively strong in some markets and not
so strong in others.
Part III: Microeconomics