The Basic Theory Using Demand and Supply

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CHAPTER 2

• The Basic Theory Using Demand and Supply

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• This chapter shows why we study theories of
  international trade and the basic theory using
  supply and demand curves.
• Trade is important to individual consumers, to
  workers and other factor owners, to firms, and
  therefore to the whole economy.
• Trade is also controversial, with perpetual
  battles over government policies toward trade.
• To understand all of this, we need to develop
  theories of why people trade as they do.

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Key Questions About International Trade

• Why do countries trade? What is the basis for
  trade, especially the product (commodity)
  composition?
• For each country, what are the overall gains (or
  losses) from trade?
• What are the effects of trade on each countrys
  economic structure? Production, Consumption.
• What are the effects of trade on the distribution
  of income within each country? Winners, Losers.

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Figure 2.1 Demand and Supply for Motorbikes
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Consumer Surplus

• The difference (or net gain) between the maximum
  that consumers would be willing to pay for a good
  and what they actually do pay. For each unit of
  the good, this is the vertical distance between
  the demand curve and price. For all units
  purchased at some price, it is the area below the
  demand curve and above the price.

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Producer Surplus

• Producer surplus is the net gain to producers
  from being able to sell a product through a
  market. It is the difference between the lowest
  price at which some producer is willing to supply
  each unit of the product and the actual market
  price that is paid, summed over all units that
  are produced and sold.

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Usefulness of these two concepts

• Consumer surplus is used to measure the impact
  on Consumers of a change in market price
• Producer surplus is used to measure the impact on
  producers of a change in market price

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Figure 2.2National Market for Motorbikes
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Figure 2.2 The Market for Motorbikes Demand
and Supply
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Figure 2.3 The Effects of Trade on Production,
Consumption, and Price, Shown with Demand and
Supply Curves
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Fig. 2.3Effects of Trade
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Figure 2.4 The Effects of Trade on Well-Being
of Producers, Consumers, and the Nation as a
Whole
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Figure 2.4 The Effects of Trade on Well-Being
of Producers, Consumers, and the Nation as a
Whole (Part 2)