Assume country Cortania starts to trade Guavas for country...

Assume country Cortania starts to trade Guavas for country Torania's What would be the likely consequences? OCortania will enjoy more Papayas at lower prices OTorania will benefit only if it is more efficient at producing Guavas OCortania will benefit only if it is more efficient at producing Papayas Only the country which is more efficient at producing Guavas will b

Transcript

00:01 In this question, we have country a and b.

00:05 The country a has pomegranates as a necessity.

00:12 In country b, pomegranates are not a necessity.

00:29 So suppose that droughts and other weather -related shocks periodically cause unexpected changes in supply conditions.

00:40 We're going to sketch a model of how the market for pomegranates in a and b will respond to supply volatility in each.

00:48 Country.

01:03 So primary products are products that are a necessity.

01:08 So in this case, homogradts are a primary product.

01:28 So primary products tend to have volatile prices.

01:41 This is because supply is inelastic in the short run.

01:47 It could vary due to weather and geopolitical events and demand is price inelastic.

01:57 So when we say inelastic, we mean that the slope of the supply and demand curve is large.

02:09 Therefore, a change in price does not lead to a significant change in quantity demanded or supplied.

02:29 So let's say that the supply curve shifts.

02:38 So here it's shifting to the right.

02:42 Now we take a look at the equilibrium price in quantity initially, and we see that it shifts like this.

03:05 So you see that although we have a large change in price, we have a small change in quantity supplied and demanded at equilibrium because of the shift.

03:26 So what if the demand was elastic? so this would occur if the good in question is not a primary.

03:40 Good...

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