In: Economics
2. The European Union (EU) and United States (US) demand and supply equations for corn
are:
QDEU =70–2PEU QSEU =20+3PEUQDUS = 130 – 3PUS QSUS = 30 + PUS
where QD and QS represent the quantities demanded and supplied in both countries (in billions of tons) and P represents the Dollar price per ton of corn in each country.
f. How much corn is traded between the two regions. Draw graphs to represent the
market situation before and after trade.
Suppose now that the US limits its imports of corn
to 14 billions of tons.
g. What will be the new equilibrium prices of corn in the
European Union and US?
h. What are the new domestic production and consumption levels in
each region? How
much corn is traded?
f. QDEU = 70 - 2PEU
QSEU = 20 + 3PEU
At equlibrium: QDEU = QSEU
70 - 2PEU = 20 + 3PEU
3PEU + 2PEU = 70 - 20
5PEU = 50
PEU = 10
QDEU = 70 - 2*10 = 50
QSEU = 20 + 3*10 = 50
So for EU, the quantity demanded is equal to quantity supplied.
For US
QDUS = 130 – 3PUS
QSUS = 30 + PUS
At equilibrium: QDUS = QSUS
130 – 3PUS = 3 + PUS
4PUS = 127
PUS = 31.75
QDUS = 130 – 3*31.75 = 34.75 = 35
QSUS = 30 + 31.75 = 61.75 = 62
Hence for US there is less of demand and more of supply. This means that US has comparative advantage in producing corn than europe. So US can export 62-35 = 27 units of its corn produced to EU.
The diagram shows the trade situation of two countries (first one of EU and second one of US). The EU reaches to equilibrium at 50 unit of quantity and 10 unit of price whereas there is excessive supply in case of US.
The after trade diagram is depicted above. Due to trade between EU and US, there is an increase in EU supply of corn. Hence the supply curve shifts to right with reaching equilibrium at Q' and P' . US on another hand will export up to that quantity of corn till it reaches equilibrium.