Ian’s decision will create disequilibrium in the market. Originally, the domestic production will go down since the cheaper imported sofas will decrease the demand of locally produced ones. However, the supply of imported sofas at $500 cannot sustain the excess demand created and therefore creating an upward pressure on price back to the equilibrium (Genc, & Reynolds, 2011, p. 438). This will normalize the domestic production.
The Ecovian entrepreneurs and workers will not be better off. This is because at the beginning, the production will go down due to low sales. The low sales will result to lying off some workers, as there is little production thus unsustainable. Even after the restoration of equilibrium in the market, the entrepreneurs will incur more expenses in hiring more workers who can sustain local production. Again, this does not mean that Ian will stop importing sofas and therefore the local entrepreneurs will embark on expensive advertisement and sales promotion process.
The domestic consumption will be adversely affected because the supply of imported sofas at $500 is far below the demand (Agarwal, & Ratchford, 1980, p. 251). There is an excess demand of 500 sofas, and the Ecovian consumers will be better off in the end. This is because stiff competition will later arise between local and imported sofas.
Two hundred and fifty (1000-750) sofas would be imported. After that, the equilibrium will be back to normal. The government of Ecovia can use trade restrictions to reduce or if possible eliminate imports. This is because cheap imports discourage consumption of locally produced goods thus leading to unfavorable terms of trade. It also inhibits the growth of the country’s infant firms not in equal competitive footage.
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