CHAPTER V:THE BASIC THEORY OFINTERNATONAL TRADE

DEMAND AND SUPPLY

Lectured by: SOK Chanrithy

I. Introduction

Trade between countries, There have been, and probably always will be, two sides to the argument.

Some argue that trade with other countries makes it harder for Some people to make a good living.

Others argue that just letting everybody trade freely is best for both the country and the world.

Four Questions about Trade

1. Why do countries trade? More precisely, what determines which products a country exports and which products it imports?

2. How does trade affect production and consumption in each country?

3. How does trade affect the economic well-being of each country? In what sense can we say that a country gains or loses from trade?

4. How does trade affect the distribution of economic well-being or income among various groups within the country? Can we identify specific groups that gain from trade and other groups that lose because of trade?

II. Demand and Supply

review the economics of demand and supply before we apply these tools to examine international trade.

We assume that the market for motorbikes is competitive. only about a single product (here motorbikes).

1. Demand What determines how much of a product

is demanded? A consumer's problem is to get as much

happiness or well-being (in economists' jargon, utility) by spending the limited income that the consumer has available.

A basic determinant of how much a consumer buys of a product is the person's taste, preferences, or opinions of the product.

This is not the only possibility-quantity purchased is unchanged if demand is independent of income, and quantity goes down if the product is an "inferior good."

How much the consumer demands of the product thus depends on a number of influences: tastes, the price of this product, the prices of other products, and income.

We would like to be able to picture demand.

Demand Curve

Qd=90,000-25P P1= 1000$, Q=65,000 P2=2000$, Q= 40,000

Consumer Surplus

Is the economic well-being of consumer who are able to buy the product at a market price lower than the price that they are willing and able to pay for the product.

2. Supply

Qs= -10,000+25P P1= 1000$, Q=15,000 P2=2000$, Q= 40,000

3. Price Elasticity of Demand The price elasticity of demand is the

percent change in quantity demanded resulting from a 1 percent increase in price.

(negative) number (above I), then quantity demanded is substantially responsive to a price change demand is elastic.

If the price elasticity is a small (negative) number (less than I),then quantity demanded is not that responsive-demand is inelastic.

Mathematical definition The formula used to calculate the

coefficient of price elasticity of demand is

Using the calculus:

III. National Market with No Trade

IV. Two National Market and Opening of Trade