On January 1,2005, quotas on clothing imports to the United...

On January $1,2005,$ quotas on clothing imports to the United States first instituted in the 1960 s to protect the U.S. garment industry were eliminated. $(L O 10-2)$ a. Demonstrate graphically how this change affected equilibrium price and quantity of imported garments.b. Demonstrate graphically how U.S. consumers benefited from the end of the quota system. c. What was the likely effect on profits of foreign companies that sold clothing in the U.S. market?

On January $1,2005,$ quotas on clothing imports to the United States first instituted in the 1960 s to protect the
U.S. garment industry were eliminated. $(L O 10-2)$
a. Demonstrate graphically how this change affected equilibrium price and quantity of imported garments.b. Demonstrate graphically how U.S. consumers benefited from the end of the quota system.
c. What was the likely effect on profits of foreign companies that sold clothing in the U.S. market?

Key Concepts

Import Quotas

Import quotas are trade policy instruments that restrict the quantity of a good that can be imported into a country. They are designed to protect domestic industries from foreign competition by limiting supply, often leading to higher prices for consumers and potential shifts in market dynamics.

Market Equilibrium

Market equilibrium refers to the point where the quantity supplied equals the quantity demanded, determining the equilibrium price and quantity. Changes in policy, such as the elimination of an import quota, shift supply or demand, leading to a new equilibrium with different price and quantity levels.

Supply and Demand Graphs

Graphical analysis using supply and demand curves helps visualize the effects of policy changes. Removing an import quota typically shifts the supply curve outward (or removes an artificial restriction), thereby lowering the equilibrium price and increasing the quantity available in the market.

Consumer Surplus

Consumer surplus represents the difference between what consumers are willing to pay for a good and what they actually pay. When the quota is removed and the price of imported garments falls, consumer surplus increases, indicating that consumers benefit from increased purchasing power and a greater availability of the product.

Profit Impact on Foreign Companies

For foreign companies, the removal of quotas can lead to increased competition and potentially lower prices in the market. While the overall volume of sales may rise due to increased demand, the reduction in equilibrium price can result in lower profit margins, affecting profitability despite a larger market share.

Transcript

00:01 As the chinese clothing industry expands and increases exports and begins lowering the world price, it's going to have very similar but slightly different effects for an importing or an exporting country.

00:15 So for an importing country, like say the united states, let's see what happens to consumer surplus, producer surplus, and total surplus.

00:24 Well, if you imagine that the world price was at the dotted green line, you would have consumer.

00:32 Surplus being everything above that dotted line below the demand curve, including this triangle in here, right? and then producer surplus would be everything below the dotted line and to the left of the supply curve.

00:52 Okay.

00:52 Now, once we actually move down to the solid green line, the new world price, the consumer surplus has now expanded to include everything above the solid green line and below to the left of, that is, the demand curve.

01:13 The producer surplus, meanwhile, has shrunk.

01:19 So most of what happened there was what was previously producer surplus just became consumer surplus, right? but there's also been an addition of a new area.

01:31 What is that? well, it's essentially this right here, that trapezoid, if you will, right? that is the addition to total surplus.

01:43 So what's happened to consumer surplus? well, that's gone up.

01:46 Producer surplus has gone down, but total surplus has increased.

01:51 In other words, consumer surplus increased more than producer surplus decreased.

01:57 All right.

01:58 Now, what about an exporting country? all right.

02:01 So here, let's say, again, the world price was formerly at the dotted green line, and it's going to fall to the solid green line.

02:10 So let's look at the before and after.

02:13 For the before, if it's at the dotted green line, you're looking at a consumer surplus in this small triangle...

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