Video tutorial for IB Economics students illustrating how to draw and analyze how the global industry for a primary commodity (steel) determines the perfectly elastic price that all firms (in all nations) must accept (price takers), which will then determine whether a nation will import (U.S.) or export steel (China).
Note:
IB Econ Paper analysis of the economic models at time 9:40
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Analysis
* Graph A: Global steel industry
* Graph B: National steel industry for the U.S.
* x-axis for both Graph A and B measure quantity supplied and demanded of steel
* y-axis for both Graph A and B measures the price of steel
Graph A: Global steel industry
* Sg (law of supply) = the sum of all firms worldwide that produce steel = global supply of steel
* Sg: PES is less than 1 (inelastic) due to length of time to extract iron and coal to forge steel
* Dg (law of demand) = the sum of all firms worldwide that demand steel as a key input in their production = global demand of steel
* Dg: PED is less than 1 (inelastic) due to no close substitute for firms that demand steel as a key input in their production
* Sg=Dg (point A), provides an equilibrium world price at Pw, and an equilibrium world quantity (Qs=Qd) at Qw
* Global steel industry establishes the world price, which is the price that all firms must accept for this primary commodity (price taker)
* Pw is perfectly elastic = world supply curve
Graph B: National steel industry in the U.S.
* Sd (law of supply) = the sum of all firms in the nation that produce steel = domestic supply of steel
* Sd: PES is less than 1 (inelastic) due to length of time to extract iron and coal to forge steel
* Dd (law of demand) = the sum of all firms worldwide that demand steel as a key input in their production = global demand of steel
* Dd: PED is less than 1 (inelastic) due to no close substitute for firms that demand steel as a key input in their production
* Sd=Dd (point B), provides an equilibrium domestic price at Pd, and an equilibrium domestic quantity (Qs=Qd) at Q1
* The U.S. opens to world trade (it engages in free trade) and accepts the world price (Pw)
* Pw is less than Pd, thus U.S. domestic steel producing firms will reduce the Qs from Q1 to Qs (point C) (some productively inefficient steel producing firms will shut down and exit the domestic and global industry since they do not have the comparative advantage due to higher production costs, this will also lead to increased unemployment in the steel industry)
* Pw is less then Pd, thus U.S. firms that demand steel as a key input in their production process will increase their Qd from Q1 to Qd (point D) (these firms thus can increase the production of their output which will generate more employment in their industry)
* Qd is greater than Qs, thus the U.S. will import steel by the quantity of Qd - Qs
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