A Demand Boom in an Import Market
Domestic demand shifts right while the world price holds still, so domestic production is unchanged and every additional unit consumed is imported.
A Demand Boom in an Import Market
International TradeDomestic demand shifts right while the world price holds still, so domestic production is unchanged and every additional unit consumed is imported.
Equilibrium at Quantity 64, Price ($) 49
Free trade at the world price
The country buys at the world price Pw, which lies below its no-trade equilibrium price. At Pw the demand curve gives domestic quantity demanded, the supply curve gives the smaller domestic quantity supplied, and imports are the horizontal gap between the two.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Demand Boom in an Import Market, step by step
- 1
Free trade at the world price
The country buys at the world price Pw, which lies below its no-trade equilibrium price. At Pw the demand curve gives domestic quantity demanded, the supply curve gives the smaller domestic quantity supplied, and imports are the horizontal gap between the two.
- 2
Tastes shift toward the good
A change in tastes means domestic buyers want more of the good at every price, so the domestic demand curve shifts right. The world price line does not move: this country is a small buyer in a large world market, so its own appetite is too small to change what the good sells for globally.
- 3
Domestic supply does not budge
Read the supply curve at the price it faces, which is still Pw. Producers respond to the price they receive, and that price has not changed, so domestic quantity supplied is exactly what it was before the boom. There is no movement along the supply curve because nothing moved the country along it. This is the step students skip most often.
- 4
Every extra unit is imported
Quantity demanded at Pw rises by the full horizontal distance the demand curve traveled, while quantity supplied is unchanged, so the import gap widens by precisely that amount. In a small open economy facing a fixed world price, a demand boom is met entirely by foreigners rather than by domestic firms.
- 5
Check the surplus areas
Consumer surplus rises, since buyers get all those extra units at the unchanged world price. Producer surplus is untouched: domestic firms sell the same quantity at the same price as before. With no tariff there is no revenue rectangle and no deadweight loss triangle. Each extra unit is bought at the world price, which is what it costs the rest of the world to supply it.
Where it ends up
With the world price fixed, a rightward shift in domestic demand leaves domestic quantity supplied unchanged, so imports rise by the full horizontal size of the shift.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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