Elasticity Of Demand Analysis

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In this diagram, SX is the supply curve and DX is the demand curve of commodity X in a large nation. When there is no trade, point E represents the point of equilibrium (the intersection between SX and DX). When there is no tax imposed on commodity X, PX is equal to £1.00; the nation consumes 200X, which is represented on the diagram by the distance AB. Out of that, 40X is domestically produced (distance AC) whilst 160X is imported (CB). In this essay, I will use this diagram to elaborate on how the imposition of a tariff by a large country will have a consumption effect, a production effect, a government revenue effect and a trade effect.

As shown in the diagram, when a tariff is imposed on a large country, the price that the domestic consumers
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The total spend on the consumption depends on whether the demand for the commodity is elastic or inelastic. If the commodity is inelastic, the total outlay will be larger, as consumers are willing to spend more money. However if the commodity is elastic, the total outlay will be smaller, as consumers are less willing to spend. This is known as the consumption effect, which is represented on this diagram by the distance BN. In this case, BN is equivalent to 30X.

As I have already explained, when the domestic price of a commodity increases, the demand for the commodity from domestic consumers will reduce. In turn, domestic production within the large country will be expanded; this is referred to as the production effect, which is represented on the diagram by the distance CM. In this case, CM is equivalent to 30X. The production effect protects the domestic industries within a large country when a tariff is
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Domestic production of the goods could increase due to the increased domestic consumer demand, which in turn could make domestic prices rise to just below the level of the tariff imposed. The tariff on imported commodities would increase the revenue collected by the government, as they would collect revenue from both the domestic consumers and foreign producers. The change in the terms of trade as a result of the imposition of the tariff would be in favour of the country imposing the tariff, due to the fact that the country would now offer less of its own exported goods in exchange for imported good from its trading partner. In conclusion, the imposition of a tariff by a large country may affect its economy by reducing demand for imports, increasing domestic production, increasing domestic prices that would help to support the local industry and it would also generate additional revenue for the

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