a) TRUE. Total surplus increase even more once demand also is more elastic and also for this reason better gains are realized from trade.b) Ambiguous. When the demand curve is perfectly inelastic, CS is boundless.c) Ambiguous. Tbelow is an increase in CS however CS is unlimited.




You are watching: If demand is perfectly inelastic, there are no gains from trade.

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Video Transcript

for this question. First, we should testimonial the idea of obtain from profession. Here we have actually a supply and also demand also graph, and this is through the initial equilibrium we have pieced are as the equilibrium price in a closed economy. Now let's say the economic climate is open up to profession and the world price is reduced than the domestic equilibrium. Price World price is delisted as a dash line in blue. Yeah, so let's look at the adjust in consumer surplus and producer surplus in a closed economy. Consumer excess is the area below the demand also curve and over the price lie. This is consumer excess producers. The blood in the closed economy is the location over the supply curve and under the Priceline. Okay, So what happened? When the economy is open to profession through a lower world price Now you can see that consumer excess will certainly rise, so you will certainly add to the initial consumer excess. This area. Yeah, producer surplus decrease. So producer excess shed component of it to consumer excess after trade. And currently producer surplus is just there's area. The surplus are still compatible with the interpretation. They should be under the demand curve for consumer excess above the supply curve for producer excess. And they are split by the equilibrium Priceline. And in a an open economic situation, the Priceline is the world price. So what is the game from trade in this graph? This triangle best right here is the get from profession. You have the right to see that the dimension of this triangle counts on the slope of the supply and also demand also curve. In other words, it relies on the elasticity of supply and demand also curves. We're considering, uh, elasticity of the demand curve below. So let's say D Here is initial demand also curve. Now, I would make it more elastic. I would certainly make it more elastic by flatten it dvery own, flattening it down. I will certainly tell this line like this. Mhm. Okay, we contact this an extra elastic demand curve. Everypoint else is the same. And currently execute you notification what happened to the gains from trade location this area? Yes. Larger. So once demand is more elastic, get from trade enhanced. As such, this statement statement in component a is true. Yeah, or component B and C, I will certainly use the same graph bereason these two questions I'll deal with the exact same situation a perfectly in elastic demand also. The demand curve is a vertical line now equivalent to the instance before This is the initial consumer excess. And this is the initial producer, SIMPLEs. When the economy is open up to trade equilibrium, price decreases Frumpy star thio, the human being price w P. And this area the rectangular location reexisting the acquire in customer surplus. We have another triangle that reexisting the gain from trait. Yeah, so you might answer to you to both statements. There is aacquire from profession, which is represented by this babsence triangle, and this location belongs to the brand-new consumer excess, so consumers still obtain from trade. However before, Okay, let me end up creating that down. Yeah, all best. However before, you can additionally answer false to both statement bereason mathematically or initially, economically customer suballows is limitless. When the demand curve is perfectly in elastic, yeah, there is no readjust in quantity demanded, no issue just how prices readjust. So on rise or decrease or including or subtracting from boundless always results to boundless consumer excess prior to and also after trade is infinite. So actually tbelow is no readjust. I think you deserve to argue both means for both statements and also it is approximately you to decide which explacountry is more reasonable to you.