A Global Shortage Lifts the World Price
The world price rises toward the domestic no-trade equilibrium, so domestic producers expand along their supply curve and the import gap narrows.
A Global Shortage Lifts the World Price
International TradeThe world price rises toward the domestic no-trade equilibrium, so domestic producers expand along their supply curve and the import gap narrows.
Equilibrium at Quantity 64, Price ($) 49
Free trade at the world price
The country trades at the world price Pw, which sits below the price where domestic supply and demand would cross on their own. Read across at Pw: quantity demanded on the demand curve is the larger number and quantity supplied on the supply curve is the smaller one. The horizontal distance between them is what the country imports.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Global Shortage Lifts the World Price, step by step
- 1
Free trade at the world price
The country trades at the world price Pw, which sits below the price where domestic supply and demand would cross on their own. Read across at Pw: quantity demanded on the demand curve is the larger number and quantity supplied on the supply curve is the smaller one. The horizontal distance between them is what the country imports.
- 2
A shortage raises the world price
Crop failures abroad shrink world supply, so the world price rises. The country is small enough to take that price as given, so the whole horizontal Pw line moves up. Neither domestic curve shifts, because nothing about domestic costs or domestic tastes has changed.
- 3
The import gap narrows
Read both curves again at the higher price. Domestic producers move up along their supply curve and expand output, because the price they receive has risen. Domestic buyers move up along their demand curve and cut back. The two quantities close in on each other, so imports shrink from both ends at once.
- 4
Surplus shifts toward producers
Producer surplus grows by the area between the old and new price lines above the supply curve. Consumer surplus shrinks by the larger area beneath the demand curve over the same price rise, so total surplus falls. If the world price ever climbed all the way to the domestic no-trade equilibrium, quantity supplied would equal quantity demanded, imports would hit zero, and the country would be self-sufficient with no policy at all.
Where it ends up
A higher world price moves the country up along both domestic curves: quantity supplied rises, quantity demanded falls, imports shrink, and producer surplus grows while consumer surplus falls.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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