Increasing part of the MC curve would be the profit maximizing point where there are diminishing returns to the variable factor. The demand curve for the industry’s product is the sum of the all the individuals’ demands. Also, a short-run industry supply curve is present. The intersection of the supply and the demand would result for the price equilibrium in the in the short run. (Brue, 2003) Total-Revenue Total-Cost Approach (Profit Maximization) Increases or decreases on the prices of tobacco in the short run would greatly affect the local income of the farmers and may also reduce the income of their country as a whole.
Importation of tobacco would be diminished. In addition, the firms may increase the prices of the products that make use of tobacco as a material to produce the good. Calculating Economic Profit Long Run Production While in the long run, since an additional or expansion of production on tobacco would mean additional costs and higher taxes, prices would shift to a higher value that may affect the demand side on tobacco production. (Brue, 2003) And this scenario may affect the profit gains of the farmers in a way that the costs incurred may outweigh the revenues that are yield from its production.
This may result to a total shutting down of production to minimize the losses that has been acquired throughout the production. Free Trade Agreement Free trade agreement has becoming a popular among nations of sovereign powers. This means that no barriers to entry and exit is provided by the trading partners regarding the import and export of the goods and services both scarce and abundant to them. A free trade agreement exists in the case of the United States and Mexico.
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The provisions in the agreement state that the United States may enter the country of Mexico anytime for agricultural products and manufactured products in the country that it may provide. (Levy, 1999) Concept of Comparative Advantage and Trading Gains In this sense, the theory of comparative advantage plays the major role of an existing trading partnership between or among sovereign nations. The theory of advantage means that the Always remember that countries employ on international trade mainly for two reasons.
First is because of the contribution of the gains that the trading may provide for each country. And, second is the difference of nations among each other. Nations, like individuals, can get benefits and advantages from these differences by getting an agreement in which the country is going to produce the goods that it does relatively well. This means that the country can efficiently produce great bulk of goods that they are specializing into. Hence, they can produce on the larger scale on that good than producing every goods that they need.
In this world, these motives are greatly reflected among the interactions of different countries. The case of Acme Motors in Mexico, which specializes only on the manufacturing of Auto turbo Quattro engines, is an example of a strategy that works by using the concept of comparative advantage. Since the place where the engines are manufactured, is the one expert on making quality turbo engines, the country or the manufacturers of the cars try to import these engines where the quality of producing them is superb.
Just like in the contents specified by the comparative advantage, efficiency would be reach when two different places which specializes on a different scale exchange the goods and services that one needs in order to continue its manufacturing of the goods. When we say for example that the Acme motors do not import engines in Mexico and try to produce their own, the quality of the car and its parts may be affected. Since the country does not specialized on that certain area, the over all outcome of the product may not result into the perfect quality it must possess.
And if the facility in Nuevo Laredo tries to make the whole car rather than only manufacturing the engines, this would also result into inefficiency because the facility in that area may not be sufficient to produce a good quality of the car as compared when it is done in the area that specializes on it. Inefficiency would come from maybe the mishandling of materials and equipments use to manufacture a car. Increased in costs may be incurred since materials needed is not common to their country that it is very expensive to acquire them.
Basically, a shift of production from Detroit to Mexico just means that the car manufacturer in the country sees that best place to get and produce the engines would be in Mexico. Some materials needed to construct the turbo engines may be of scarcity in Detroit that the production of engines was shifted in Mexico. Again this plan works under the provision of the theory of comparative advantage. Assembling the car in the United States, on the other hand, means that the facilities in their United States’ office is well equipped to handle the assembling of the car.
Since the main office, most often, has the complete facilities and skilled laborers to assemble the cars. Also, they look at the point that most of their customers are residing in the country. Greater costs would be used in shipping and transporting the whole car to United States if it is to be assembled in Mexico. As compared when only the parts are transported back to the country. costs would not be that high for their prices to shoot up.
These are mainly the reasons why facility in Nuevo Laredo only manufactures the engines and does not make the cars in the over all basis. Gains from trade may come for different reasons, one may be of monetary value, second would be on specializing the production of goods common to a country, and third would be the availability for the exchange of assets and bonds among trading countries. All of these cause the countries to diversify and reduce the variations in their income and wealth. I like to end this essay by citing the words of Adam Smith on trading:
"If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. " LIST OF
Brue, S. (2003). Economics: principles, theories, and problems. New York: Mc Graw-Hill Companies, Inc Dornbusch, R. S. , (2000). Macroeconomics. New York: Mc Graw-Hill Companies, Inc. Hunt, C. (2002). Global and local benefits of subsidizing tropical forest conservation. United Kingdom: Cambridge University Press
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