The price taker model

What the model shows

• New Zealand is a small economy. For most goods it produces a tiny share of world output, so nothing New Zealand does changes the world price.
• That makes New Zealand a price taker: it must accept the world price as given.
• The price taker model puts one New Zealand market — supply and demand for a single good — against a fixed world price.

How to read it

• Axes: price ($) on the vertical, quantity on the horizontal.
• S — New Zealand producers' supply, sloping up.
• D — New Zealand consumers' demand, sloping down.
• Pw — the world price, drawn as a horizontal line right across the diagram.

Why the world price is horizontal: New Zealand can sell as much as it likes, or buy as much as it likes, at that price without changing it. The line is flat because supply from (or demand by) the rest of the world is effectively unlimited at the world price, from New Zealand's point of view.

Case 1 — the world price is ABOVE the domestic equilibrium: New Zealand EXPORTS

• At the high world price Pw:
  • New Zealand producers want to supply a lot → read Qs off the S curve.
  • New Zealand consumers want to buy less, because the price is high → read Qd off the D curve.
• Qs is greater than Qd. The surplus is exported.

$$\text{Exports } (X) = Q_s - Q_d$$

• New Zealanders pay the world price for a New Zealand-produced good — producers would not sell domestically for less than they can get overseas.

Case 2 — the world price is BELOW the domestic equilibrium: New Zealand IMPORTS

• At the low world price Pw:
  • New Zealand consumers want a lot → Qd is large.
  • New Zealand producers cannot profitably supply much at that low price → Qs is small.
• Qd is greater than Qs. The shortfall is imported.

$$\text{Imports } (M) = Q_d - Q_s$$

What happens when something changes

Change	What moves	Effect on exports
World price rises	Pw line moves up	Qs rises, Qd falls → exports increase
World price falls	Pw line moves down	Qs falls, Qd rises → exports decrease
NZ supply increases (better harvest, new technology)	S shifts right	Qs rises at the same Pw → exports increase
NZ supply decreases (drought, disease)	S shifts left	Qs falls → exports decrease
NZ demand increases	D shifts right	Qd rises → exports decrease

Critical point: when New Zealand's supply or demand shifts, the world price does not move. New Zealand is a price taker — the Pw line stays exactly where it is, and only Qs, Qd and the export gap change.

Export receipts

• Export receipts are the total money earned from exports:

$$\text{export receipts} = P_w \times X$$

• On the graph this is the rectangle whose height is Pw and whose width is the export gap.
• Watch what happens when the world price falls: the price per unit falls but the quantity exported also falls (Qs down, Qd up). Both effects push receipts down, so export receipts unambiguously fall.
• When supply increases at an unchanged world price, the price is the same and the quantity is larger, so export receipts unambiguously rise.