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CHAPTER V:THE BASIC THEORY OF
INTERNATONAL 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

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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

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1.
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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).
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

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
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.

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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