The Demand Curve Of Commodity Essay

841 Words Dec 9th, 2015 4 Pages
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 pay rises to £1.75 whilst the price that the foreign producers will receive decreases to £0.75. This is due to the burden of the tariff, which falls partially on the domestic consumer and partially on the foreign producers. The reason for this is due to the reduction in demand for the imported commodity impacting the world price of that commodity. In comparison, if an import tariff of 100 per cent were to be imposed on a small country, PX will rise to £2.00.

Due to the price rise to £1.75 that the domestic consumers will pay for commodity X, the demand for the commodity will fall due to consumers being less willing to buy it. The total spend on the consumption depends on whether the demand for the commodity is elastic or inelastic.…

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