Question

The world price of wine is below the price that would prevail in Canada in the absence of trade. a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table. b. Now suppose that an unusual shift of the Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harvest there. What effect does this shock have on the world price of wine? Using your graph and table from part (a), show the effect on consumer surplus, producer surplus, and total surplus in Canada. Who are the winners and losers? Is Canada as a whole better or worse off?

Answer 1

A) As indicated in the illustration, the world price is below the equilibrium level (WP) in free trade. In Canada, the cost is P. The economy's surplus is as follows:

• (1+2+4+5) represents the region of consumer excess.
• The area is represented by producer surplus (4).
• The total excess is represented by (1+2+3+4+5).

b) The devastation of the grape crop in the Gulf Stream will cause an economic supply shock. This will restrict grape supply, causing grape prices to rise owing to a lack of supply. This will raise wine prices all around the world. As a result, as illustrated in the graphic, the global price of wine will now rise. The Canadian wine price will be P, while the global wine price will be WP.

The economy's surplus is as follows:

• The area is represented by consumer excess (1).
• (2+3+4) represents the region of producer surplus.
• The total excess is represented by (1+2+3+4).

What is Equilibrium Level in Economics?

When aggregate supply and aggregate demand are equal, an economy is said to be at its equilibrium level of income. In other terms, it occurs when GDP equals total spending.

When supply and demand levels align, economic market equilibrium occurs, resulting in perfect market circumstances for buyers and sellers. Microeconomic and macroeconomic equilibrium are two forms of economic equilibrium. Supply and demand between buyers and sellers are balanced in microeconomics.

Learn more about Equiblibium Level:

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