Economics Development and Testing of Heckscher

Questions: 1.You are the only supplier of a product and you are seeking to increase your revenue. Under what conditions would you (a) take the decision to lower the price of your product or (b) take the decision to raise the price of your product in order to achieve your goal of increased revenue.2.A country that can produce all goods more efficiently than any other country has no need to engage in trade. Discuss. Answers: 1. A single supplier of a given good that seeks to raise its revenue can decide to lower the price of the good or increase the price of the good to meet this goal. The supplier can target a given population and charge less but increase the demand for the good. Since revenue is got but price multiplied by price, a reduced price with increase quantity demanded and sold will still raise revenue since the effect of reduced price is counterbalance with the increased demand. The seller will increase the price but target wealthy people who will still by the product at high price though at reduced demand by the poor people. In this the higher price will pay off the reduced demand hence revenue will still increase by multiplying higher price with the reduced quantity sold. A single seller in the market can apply pure market discrimination as shown in the diagram above. The seller can split consumers according to their ability and sell to each based on their income ability in order to obtain the determined profit. 2. This section discusses the statement A country that can produce all goods more efficiently than any other country has no need to engage in trade. Economist has, however, reached a consensus that it is that trade between economies that make their people healthier. Even though worldwide trade remains a more quarrelsome of political matters equally locally and amid administrations, trade is required (Irwin, 2009). It is, therefore, true that even an economy which is additional competent (with absolute advantage) in all it makes, it would still gain from trading activities. The main driver of trade is comparative cost and not absolute cost of production. A given country is efficiently productive compared another country in every product. This is in the manner that such a country could make any product utilizing less factor of production than another country needs to produce the same product. Nevertheless, economist hold that such an economy will be gaining still from trade based on the comparative advantage. In this case, it will need to export the goods that it has a higher absolute advantage and then import goods whereby its absolute advantage is comparatively low even when it is non negative. Despite the a given country being two times as productive as the partner in trade in producing a good, if in case it is thrice as industrious in creating building aircrafts or steel, such a country will benefit by specializing on production and exportation of steel and aircrafts and importing clothes from its trading partner (Baldwin, 2008). The trading partner will benefit through the exportation of clothes whereby it enjoys a comparative advantage and not absolute advantage in return for the steel and aircraft. Due to comparative advantage, both countries will raise their living standards hence increasing its economic development. Even developing countries with no absolute advantage in any field benefit from trade because it has a comparative advantage in producing certain goods hence will profitably trade with developed economies. References Baldwin, R. E. (2008). The Development and Testing of Heckscher-Ohlin Trade Models: A Review, (Cambridge, Massachusetts: MIT Press). Irwin, D. A. (2009).Free Trade under Fire (Princeton, New Jersey: Princeton University Press, 3rd ed.)