Economics for Business: Understanding Demand and Protectionist Trade

This essay delves into key economic principles relevant to business, focusing on demand, supply, and trade policies. It differentiates between changes in quantity demanded (movements along the demand curve due to price changes) and changes in demand (shifts of the demand curve due to factors other than price). The essay further critiques protectionist trade policies, particularly those proposed by President Trump, arguing that they are fallacious due to their distortionary effects on business and society, potentially leading to welfare losses by restricting trade benefits and increasing costs for businesses and consumers. The analysis incorporates theoretical frameworks such as absolute and comparative advantage to illustrate the benefits of free trade and the potential drawbacks of protectionism.

Running Head: ECONOMICS FOR BUSINESS
Economics for Business
Name of the Student
Name of the University
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Table of Contents
Answer to question 1.......................................................................................................................2
Introduction..................................................................................................................................2
Analysis.......................................................................................................................................2
Conclusion...................................................................................................................................5
Answer to question 2.......................................................................................................................5
Introduction..................................................................................................................................5
Analysis.......................................................................................................................................6
Conclusion...................................................................................................................................8
Reference list...................................................................................................................................9

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Answer to question 1
Introduction
Demand in economics represents willingness of buyers in support of the ability to pay the
market determined price of the concerned goods and service. The concept of quantity demanded
differs significantly from that of the change in demand. Former represents demand change due to
change in price while later is demand change results from factor except price (Nguyen & Wait,
2015).
Analysis
Change in quantity demanded
Change in quantity demanded is associated with a change in amount of commodity
demanded. Such change is indicated by a movement along the demand curve. Quantity
demanded of a commodity change in response to the change in own price of the product. The
direction of change in quantity demanded is explained by the law of demand. According to this
law, given all other factors constant demand of a good moves in opposite direction of price.
Quantity demand therefore increases with a decrease in price while demand decreases with
increase in price (Nicholson & Snyder, 2014). The increase in quantity demanded is known as
extension of demand and is indicated by a movement along the demand curve from left to right.
The decrease in the quantity demanded is called contraction of demand represented by the
movement on the demand curve from right to left.

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Figure 1: Demand curve and change in quantity demanded
As price increase from P1 to P2, there is a decline in quantity demand indicated by a movement
along the demand curve from E1 to F. Opposite is the case with a decrease in price to P3. At lower
price there is an increase in quantity demanded shown with a movement on the demand curve
from E1 to G1.
Change in demand
Instead of a movement along the demand curve, change in demand is associated with a
shift in the demand curve. Unlike change in quantity demanded, demand changes due to a
change in demand determinants factors excluding price. In case of change in demand, demand
curve shifts to a new position. Factors that causes change in demand include change in income,
change in price of the related goods, change in the taste and preferences for the goods and such
other factors (Varian, 2014). Change in demand is distinguished into two situation. An increase
in demand resulted from a direction of changes in factors favorable to demand such as increase

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in income, increasing preferences for the good, increase in prices of substitute goods and other.
In this situation, demand curve shifts to the right. In case of decrease in demand, demand curve
shifts to the left. Demand decreases due to change in factors in a way unfavorable to demand
(McKenzie & Lee, 2016).
Figure 2: Impact of a decline in demand

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Figure 3: Impact of a decline in demand
Conclusion
In conclusion, the primary difference between change in demand and change in quantity
demanded is that quantity demanded represents change in the amount demand with a change in
price and shown the movement on the demand curve. Change in demand on the other hand
results from change in change in factors excluding price and shown by the inward or outward
shift of the demand curve.
Answer to question 2
Introduction
The policy of protectionism indicate economic policy that interrupt the free flow of good
and service among nations. Such policies aim to restrict imports by imposing a tariff or quota or
implementing direct regulation (Helpman & Razin, 2014). The protectionist policy imposed by

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US President Donald Trump is fallacious as argued in context of its adverse impact on the
economy.
Analysis
Self-sufficiency of a nation is an absurd concept. It is not possible for any nation to
produce all goods with equal efficiency. Hence, countries involve in trade relation where goods
produced in line of relative specialization are exchanged. Trade is mutually beneficial process
where countries export goods in which it enjoys a cost advantage while import the good
producing which requires a higher cost. Two popular theories explaining line of specialization
are the theory of absolute advantage and the theory of comparative advantage. Former proposed
by Adam Smith determine specialization based on the absolute cost difference (Feenstra, 2015).
However, in situation when one country has lower absolute cost in all the goods then direction of
trade is determined from difference in opportunity cost. The theory of specialization based on the
opportunity cost is known as the theory of comparative advantage. David Ricardo pioneered the
theory of comparative advantage. With trade goods are produced with least possible cost.
Therefore, a wide variety of goods are available in the word market benefitting all the
participating nations.
Unite State is one of the global leader of international trade. United State has a
comparative advantage on capital intensive trade because of abundance human and physical
capital. United State trade with developing nation exporting labor-intensive good. US also enjoys
an absolute advantage in agricultural goods such a different grains, fruits, seeds and others.
These goods are also exported to China and other nations. In response to growing trade deficit,
President Trump has proposed a protectionism policy in the form of huge tariff of goods
imported from European Union, Mexico, China and Canada (nytimes.com, 2018). From

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theoretical point of view, tariff is imposed to promote purchasing from domestic suppliers. The
protectionist policy of Trump however would make no better off for United States. The policy by
eliminating benefits from trade might have a long term impact on US economy.
There is no doubt that the policy of trade liberalization mostly benefit middle and lower
class Americans. Following the theory of comparative advantage, free trade policies has
increased productivity causing a decline in prices. The lower price increase standard of living of
average household. The supporters of protectionist policy states trade to be a zero sum game.
The assumption however does not hold in real world. The imposed tariff also hurts businesses by
restricting import of cheaper manufacturing input (theconversation.com, 2018). Trump’s
protectionist’s policy thus is not at all effective from both from the viewpoint of theory and
practice. The resulted welfare loss from tariff can be seen from the diagram given below.
Figure 4: Fallacy of protectionist policy

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Conclusion
President Trump has suggested to impose heavy tariffs on imported goods from China,
Mexico and other nations arguing such policy would help to reduce trade deficit. The policy
however is fallacious in reference to its distortionary effect on business and society.

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Reference list
Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university
press.
Helpman, E., & Razin, A. (2014). A theory of international trade under uncertainty. Academic
Press.
McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Nguyen, B., & Wait, A. (2015). Essentials of Microeconomics. Routledge.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application. Nelson
Education.
Swanson, A. (2018). Will 2018 Be the Year of Protectionism? Trump Alone Will Decide.
Retrieved from https://www.nytimes.com/2018/01/03/us/politics/2018-trump-
protectionism-tariffs.html
Trump's protectionism continues long history of US rejection of free trade. (2018). Retrieved
from https://theconversation.com/trumps-protectionism-continues-long-history-of-us-
rejection-of-free-trade-91190
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.