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Welcome to Economics 24: Competing Philosophies in US Economic Policy (c) 2001 J. Douglass Klein (c) 2001 J. Douglass Klein Please go to: http://online.union.edu Login: your e-mail user name Password: Your student ID 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