Final answer:
A tariff reduction typically lowers the cost of imported goods, resulting in a rightward shift in the supply curve, which decreases the equilibrium price and increases the equilibrium quantity of the product (shoes) in the domestic market.
Step-by-step explanation:
Impact of Tariff Reduction on Domestic Supply and Demand
When analyzing the impact of a tariff reduction on a domestic economy, particularly on the supply and demand for goods, we follow a four-step analysis:
Draw the graph with the initial supply and demand curves for the product in question, which, in this instance, are shoes in a small open economy. Label the equilibrium price and quantity where the supply and demand curves intersect.
Identify whether the economic event (a reduction in tariff) affects the supply or demand side of the market. A tariff is considered a cost of production for imported goods; thus, a change in tariff rates will affect the supply curve.
Recognize that a tariff reduction equates to a decrease in the cost of production for imported goods. Graphically, this is shown as a rightward (or downward) shift in the supply curve, representing an increased willingness of foreign producers to supply at any given price.
Observe how the rightward shift in supply leads to a movement down the demand curve. This results in a lower equilibrium price and a higher equilibrium quantity of the product in the domestic market. The new equilibrium point is where the shifted supply curve intersects with the demand curve.
In conclusion, a reduction in tariffs generally benefits consumers in the domestic market by lowering prices and increasing the quantity available for consumption. However, domestic producers may face increased competition from imported goods, potentially impacting their market share and profitability.