Introductory Economics: Microeconomics

Running head: INTRODUCTORY ECONOMICS
Microeconomics
Name of the Student
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Course ID
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1INTRODUCTORY ECONOMICS
Table of Contents
Answer 1..........................................................................................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................3
Answer c......................................................................................................................................4
Answer d......................................................................................................................................5
Answer 2..........................................................................................................................................6
Answer a......................................................................................................................................6
Answer b......................................................................................................................................7
Answer c......................................................................................................................................8
Answer d......................................................................................................................................8
References list................................................................................................................................11

2INTRODUCTORY ECONOMICS
Answer 1
Answer a
The free trade agreement allows Australia to freely trade beef to the Canadian economy
at the world price. The impact of free trade on consumer, produce and overall social welfare of
Australia is illustrated in the figure below.
Figure 1: Impact of free trade on Australia
Domestic market demand and supply of beef in Australia is represented by the respective
curve denoted as DD and SS. Without trade, domestic price and quantity is determined by the
domestic supply and demand condition (Viner 2016). Price then is settled at P* and equilibrium
quantity of beef is at Q*. As Australia involves in free trade, domestic producers face a higher
world price at Pw. With a higher world price domestic supply of beef lowers to Q1 from the

3INTRODUCTORY ECONOMICS
earlier equilibrium position of Q*. While domestic supply increases to Q2. The excess of supply
(Q2 – Q1) is now exported to Canada. After trade, the high world price reduces consumer surplus
from (A + B + C) to A only. The surplus to producers following free trade increases from (D +
E) to (B + C + D + E +F). As gain in producer surplus exceeds the loss in consumer surplus there
is a net gain in welfare of Australian economy indicated by the area F.
Answer b
Figure 2: Effect of import quota on Canada
In the above figure PFT shows free trade price of beef in the world market. At this price,
domestic supply of beef is lower than that of domestic demand resulting in an import of exceed
demand shown by the blue line in the above figure. Now suppose, Canada imposes an import
quota which restricts the imported quantity indicated by the red line. The imposed quota leads to
an immediate shortage of beef in Canada raising import price in Canada to P0IM. Price of beef in
the exporting nation on the other hand lowers to P0EX. Equilibrium price in Canada thus reached