Final answer:
Reducing tariffs leads to a decrease in production costs for imported goods, resulting in a supply shift to the right, increasing the equilibrium quantity of imports and decreasing the equilibrium price.
Step-by-step explanation:
When you reduce tariffs, there is a direct impact on international trade dynamics. A tariff is essentially a tax on imported goods, and by reducing these tariffs, import costs for businesses are lowered. This is equivalent to a decrease in the cost of production for products that use imported components or raw materials. As a consequence, the supply curve in the market shifts to the right, or downward, indicating an increase in the quantity of goods supplied at any given price.
This change in supply leads to a new market equilibrium where the equilibrium quantity of imported goods increases since suppliers are more willing to sell at lower prices, and the equilibrium price decreases, benefiting consumers who now have access to cheaper imported goods. The increase in the quantity of imports enhances competition in the domestic market, which can lead to greater efficiency and innovation among domestic producers.
- Explain how a tariff reduction causes an increase in the equilibrium quantity of imports and a decrease in the equilibrium price. Hint: Consider the Work It Out "Effects of Trade Barriers."