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Welcome to
Economics 24:
Competing Philosophies in
US Economic Policy
(c) 2001 J. Douglass Klein
(c) 2001 J. Douglass Klein
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Click on Economics 24
(c) 2001 J. Douglass Klein
•Syllabus
•Course rules
•Reading outline
•Computer requirements
•How to use Blackboard
- Tools
- Survey
- Discussion
(c) 2001 J. Douglass Klein
Molasses Act - Economic Concepts
• Supply and Demand in a market determine the
market price.
• A shift in Supply results in a new equilibrium price.
• A tax on imports is designed to cut supply and raise
price.
• A tax on imports may create incentives for smuggling
because two prices exist in two different places.
• The discouragement to British sugar planters is
because lower prices (to them) reduce (and maybe
even eliminate) their profit.
(c) 2001 J. Douglass Klein
Supply and Demand in a market determine
the market price.
Supply
Price
P1
Demand
Q1
(c) 2001 J. Douglass Klein
Quantity
A shift in Supply results in a new equilibrium price.
Supply
Price
S’
P1
P2
Demand
Q1 Q2
(c) 2001 J. Douglass Klein
Quantity
A tax on imports is designed to cut supply and
raise price.
S’ + Tax
Price
S’
P3
P2
T
Demand
Q2
(c) 2001 J. Douglass Klein
Quantity
A tax on imports may create incentives for smuggling
because two prices exist in two different places.
S’ + Tax
Price
S’
P3
P2
T
Demand
Quantity
P3 is paid by British buyers. P2 is paid by other buyers.
Smugglers can buy at P2 and sell at P3.
Can you think of a modern parallel?
(c) 2001 J. Douglass Klein
The discouragement to British sugar planters is
because lower prices reduce (and maybe even
eliminate) their profits.
Price
Prices
given
by
entire
market
S&D
MC
AC
P1
P2
Profit
Loss
Quantity
Q2
Q1
One (small) British Planter (price taker)
(c) 2001 J. Douglass Klein
Differences between the
Northern and Southern American Colonies.
“…our northern settlements, we have found, are full of farmers,
fisherman, seamen; -but no planters. This is precisely the case
with Britain herself; consequently a rivalry between them must
inevitably take place.” (p. 96)
“American corn cannot come to an European market without
doing mischief to the corn trade of England” (p. 97)
Under which circumstances will there be the
greatest gains from trade?
(c) 2001 J. Douglass Klein