Summary The Economics of European Integration - Economics of European Integration (EC2IEEI) (EC2IEEI)
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Cours
Economics of European Integration (EC2IEEI)
Établissement
Universiteit Utrecht (UU)
Book
The Economics of European Integration 6/e
summary of ALL chapters needed for the exam (1-16) with all diagram explained and added background information and written in understandable language
also includes lecture notes worked into the summaries for ALL lectures
Notes for Economic Aspects of European Integration
Samenvatting - Algemene economie 2
The Economics of European Integration - volledige studiestof samengevat
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École, étude et sujet
Universiteit Utrecht (UU)
Minor Economics
Economics of European Integration (EC2IEEI)
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jairaligtenberg
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Chapter 4: Essential microeconomics of european integration
Preliminaries I: supply and demand diagrams
Positive analysis: price and quantity effects
Normative analysis: welfare effects
Example: cups of coffee - demand
Marginal utility curve shows how much extra joy a consumer gets from having one more cup
starting from any given number of cups already consumed
1. Buys very few cups of coffee today (c') → gain from buying an extra one is higher (mu’)
already bought lots of cups already (c’’) → gain from one more is lower (mu")
→ So the price should be lowered to convince the consumer to buy another
Allows us to work out how much the consumer would buy at any given price
- Buy up to the point where the last one bought is just worth the price (c*)
- At pm no one buys coffee (too expensive)
For supply curves, this optimisation is done by firms (see right graph)
Marginal = cost of one more unit of the good
- Marginal cost of production often declines with scale of productive
- The firm will supply goods up to MC = P under perfect competition
- Optimum at p* → q*
Welfare analysis: consumer and producer surplus
Consumers buy up to the point where the marginal utility = P
Consumer surplus = difference of willingness to pay for a good and the price that consumers
actually pay for it
- Increases as the price of a good falls and decreases as the price of a good rises
- Area under the demand curve up to P
,Producer surplus = total amount that a producer benefits from producing and selling a quantity of
a good at the market price
- TR - MC = producer surplus
Import supply curve = a reflection of how much it costs foreigners to supply the goods
- If imports of the good were banned: normal market equilibrium at P*
- Import demand is zero at P*
- At P' → shortage → P’ becomes domestic price and imports are required
- Consumption demand = C' domestic supply = Z'
- Import M' = C' - Z'
,The level of imports that corresponds to P' (line drawn across) = M’ (point 3)
- Doing the same for every import price →
Import demand curve (MDH) = amount of imports that the nation wants at any given
domestic price → curve
Welfare analysis
To what extent to which a policy raises or lowers a nation's wellbeing (measured through money)?
Eg. Consider increase in import price from p' to p"
At P* import = 0 and export = 0
At P” supply = Z” demand = C” Z” - C” = line C
At P’ supply = Z’ demand = C’ Z’ - C’ = line C + B + D (B + D = E)
Welfare = utility gained through the achievement of material goods and services
Import price and domestic price must change equally to ‘make up’ for the ‘loss’
Higher import price → domestic price rises by the same amount
Price increase → decreases consumer surplus by A + B + C + D (LEFT)
(area under demand curve to P)
→ increases producer surplus by A (LEFT)
(area above supply curve to P)
Import price increase → net loss to the country of B + C + D (LEFT)
(A cancels out → gain for producers / loss for consumers)
Net loss →C+E (E = B + D) (RIGHT)
, Trade volume effects & border price effects
- MDH curve shows marginal benefit of imports to home
Home loses areas C and E when the price of imports rises from p' to p"
- Price increase → home pays more for the units it imported at the old price
- Border price effect = area C
Eg. price increase was €1.2 per unit and M" was 100 → loss = €1.2 x 100
Home reduces its imports at the new price
- Import volume effect = area E = how much home loses from the drop in imports
- Marginal value of the first lost unit = height of the MDH curve at M"
- But since home had to pay p' for this unit → net loss = gap between P and the MDH curve
- If we add up the gaps for all the extra units imported, we get the area E
Why does MDH show the marginal benefit of imports to home:
1. MDH curve: difference between domestic demand and domestic supply
2. Domestic supply (= domestic MC) + domestic demand = domestic MU curve
3. Domestic MU - domestic MC = nation’s net gain of producing and consuming one more unit
4. An extra unit of import → higher consumption & lower domestic production → higher utility
and lower costs (shown in the MDH curve
Nations import up to the point where the marginal gain from doing so = MC
- Border price = MC → so border price is an indication of the marginal benefit of imports
Border price + T = domestic price
- Increase in price → less demand
- Increase in tariff doesn’t lead to same increase domestic price → border price decreases
(export less)
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