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- 2. OBJECTIVES In this chapter we will extend the analysis of price policies to multiple markets. Establish the cross-price elasticity of the two market model. How the change in price in one particular market affects the other one. Broader concept of price policies with graphical analysis will be displayed. Use of multiple supply and demand functions to see the empirical evidences and its calibrations accordingly. Impacts on political variables such as foreign exchange, government budget and welfare. Lastly the calibrations and the excel simulation of this entire chapter accordingly.
- 3. Interdependencies between markets We see that in the diagram that there is two commodity market in two different situations. Protectionist price policy is applied to market 1 in an import situation 2nd market is in equilibrium at autarky with no intervention. Price in market 1 goes up due to price protection and the second market is affected accordingly. As a result it provides an incentive to use fewer resources for product 2 and therefore a leftward shift in the supply curve in this market As price increase in market 1 demand in market 2 will go up as a result a rightward shift in the demand curve in the 2nd market Similarly price change in market 2 also affects market 1 .
- 4. Cross price elasticity In order to understand the interdependencies between markets, we have to use the cross-price elasticity. Here the mathematical formula shows or explains that how the supply of the first product depends on its price and the price of the second product. We can understand the relationship between both the products through its outcome or solution.
- 5. Iso-elastic supply and demand functions The equations are being used to formulate the two market model. On this basis we can derive the political variables for both markets. In the multi-market model it applies that all supply and demand functions need to calibrated i.e. relevant constants for the model equations have to be determined. The equation is the supply constant of the first product. Tells us that with the extension of the model from one market to two market, the calculation of the constant changes because the quantity supplied is also explained via the price relation between the two markets.
- 6. Consequences of an increased world market price of one product for foreign exchange revenue in interdependent markets We will see how price policy affect relevant political objectives in both markets. Consequences of an increased world market price of one product for foreign exchange on two markets, assuming free trade in both markets. Since price of the second market is constant, so therefore there will be no shifts in market 1. Increased world price leads to increased foreign expenditure in the market. Shifts in the second market occur due to world price increase in the first market. Result depends on cross-price effect and on price policies. If autarky takes place in the second market then it wont be affected by the foreign exchange since it has no function during an autarky situation.
- 7. Budget functions in two markets with an increasing protectionist price policy in the first market and a given protectionist policy in the second market The graph first shows the impact of an increasing protectionist price policy on an import market without any cross-price effects. Considering cross-price will lead with respect to a protected export market, increased domestic price in the first (import) market will then lead to additional budget expenditure in the export market. As a result we get the budget function B1 for the first market under a given price policy assumptions (constant P2) Similarly we obtain the budget function B2 for the second market in relation to P1. Finally the aggregated budget function = B1 + B2
- 8. Supply and demand functions given for excel simulation