Answer to Question #223173 in Microeconomics for henvi

Question

Assume Thailand is a petroleum exporter on the global market. Draw the petroleum market in Thailand before and after international trade using a demand and supply graph (draw a graph), assuming the world price for petroleum is above the Thailand petroleum market before open for international trade. Identify and show (draw a graph) the change in consumer surplus, producer surplus, and total surplus seeing as Thailand is now open for international trade. Additionally, give some explanations for what happened.

Answer 1

Graph 1 shows the petroleum market situation in Thailand before international trade. The equilibrium price is P* while the equilibrium quantity is Q*. Consumer surplus is shown by the triangle shaded yellow, while producer surplus is shown by region shaded blue. CS + PS = Total Surplus. 

Graph 2 shows the market for petroleum in Thailand with international trade. The world price is P1, higher than the price in Thailand in the absence of trade, P*. As a result, consumer surplus reduces to region shaded yellow while producer surplus increases by area C and E. Higher world price shows that Thailand has a comparative advantage in the production of petroleum. Q2 shows the quantity produced by domestic producers while Q1 showers the quantity consumed by local consumers. Therefore, the difference between Q2 and Q1 represents exports.

Summary

• Consumer surplus has declined because of the higher world price.
• Producer surplus has increased because they can sell petroleum at a higher price.
• The total surplus has also increased since international trade increases the price of exported petroleum. In graph 2, an increase in total surplus is shown by region E.