1. The Basic Theory Using Demand and Supply
CHAPTER 2
The Basic Theory Using Demand and Supply

2. 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.

3. 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 country’s economic structure? Production, Consumption.
What are the effects of trade on the distribution of income within each country? Winners, Losers.

4. Figure 2.1 – Demand and Supply for Motorbikes

5. 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.

6. 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.

7. 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

8. Figure 2.2 National Market for Motorbikes

9. Figure 2.3 – The Effects of Trade on Production, Consumption, and Price, Shown with Demand and Supply Curves

10. Fig. 2.3 (cont.) Effects of Trade

11. Figure 2.4 – The Effects of Trade on Well-Being of Producers, Consumers, and the Nation as a Whole

12. Figure 2.4 (cont.) – The Effects of Trade on Well-Being of Producers, Consumers, and the Nation as a Whole