A Global Glut Pushes the World Price Down
A global glut drives the world price lower, so imports widen, domestic producers supply less, and consumers gain more than producers lose.
A Global Glut Pushes the World Price Down
International TradeA global glut drives the world price lower, so imports widen, domestic producers supply less, and consumers gain more than producers lose.
Equilibrium at Quantity 64, Price ($) 49
Free trade at the world price
This is a small country whose market is open to trade, so it takes the world price Pw as given and can buy any quantity at that price. Pw sits below the price where domestic supply and demand would cross on their own. Read across at Pw: domestic quantity demanded on the demand curve is larger than domestic quantity supplied on the supply curve. The horizontal gap between the two curves at that price is imports.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Global Glut Pushes the World Price Down, step by step
- 1
Free trade at the world price
This is a small country whose market is open to trade, so it takes the world price Pw as given and can buy any quantity at that price. Pw sits below the price where domestic supply and demand would cross on their own. Read across at Pw: domestic quantity demanded on the demand curve is larger than domestic quantity supplied on the supply curve. The horizontal gap between the two curves at that price is imports.
- 2
A glut lowers the world price
A record harvest abroad floods the world market and the world price falls. Pw is a price this country accepts rather than sets, so the whole horizontal price line drops. Neither domestic curve moves, because no determinant of domestic supply or domestic demand has changed. The only thing that changed is the price the country faces.
- 3
Read both curves again
Read the two domestic curves again at the lower price. Domestic producers slide down along their supply curve and offer less, while domestic buyers slide down along their demand curve and want more. Both movements are along the curves, not shifts of them. The gap between the two quantities is wider than before, and every unit inside that gap arrives as an import.
- 4
Who gains and who loses
Consumer surplus expands by the area between the old and new price lines beneath the demand curve. Producer surplus shrinks by the smaller area between the same two price lines above the supply curve. The consumer gain is larger than the producer loss, so total surplus rises and the country gains from the cheaper world price. That is why cheap imports lift the country overall even while domestic producers are worse off.
Where it ends up
A fall in the world price widens the import gap from both ends: domestic quantity supplied falls, quantity demanded rises, and consumer surplus grows by more than producer surplus shrinks, so total surplus rises.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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