Demand and Supply,
Offer Curves
and Terms of Trade
Chapter 4
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1 Introduction

Derive the demand and supply curve, derive
offer curves for the two nations, and determine
the equilibrium volume of trade and the
equilibrium relative commodity price;
 Make partial equilibrium analysis to derive the
relative commodity price with trade;
 Make general equilibrium analysis to derive
the offer curves;
 Analyze the interaction of the offer curves of
the two nations;
 Discuss the terms of trade.
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1 Introduction
•
•
•
•
Offer curves
Terms of demand
Commodity or net barter terms of trade
General equilibrium model
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2 Partial Equilibrium Analysis
 Partial equilibrium analysis
utilizes the demand and
supply curves to derive the
equilibrium relative
commodity prices.
 It deals with the market for
one commodity, either X or Y.
It does not consider the
mutual influence of the two
commodities.
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2 Partial Equilibrium Analysis
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3 Offer Curves
An offer curve of a nation shows how much
the nation is willing to export and how much the
nation is willing to import at various relative
commodity prices.
The offer curve can be derived rather easily
from the nation's production frontier, its
indifference map, and the various relative
commodity prices at which trade takes place.
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3.1 Derivation of Offer Curves
of Nation 1
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3.2 Derivation of Offer Curves of
Nation 2
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4 General Equilibrium Analysis
The intersection of the two curves defines
the equilibrium relative commodity price at which
trade takes place between them.
Only at this equilibrium prices will trade be
balanced between the two nations. At any other
relative commodity price, the desired quantities
of imports and exports of the two commodities
would not be equal. This would put pressure on
the relative commodity price to move toward its
equilibrium level.
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4 General Equilibrium Analysis
Equilibrium Relative Commodity Price with Trade
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5 Equilibrium Relative Commodity Price
with Partial Equilibrium Analyses
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5.1 Comparison between Partial &
General Equilibrium Analysis
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5.1 Comparison between Partial &
General Equilibrium Analysis
Both analyses are derived from the nation's
production frontiers and indifference maps, and they
show the same information.
But in general equilibrium analysis, we consider all
markets together, not just the market for commodity X.
This is very important because changes in the market for
commodity X affect other markets and these may give
rise to important influence on the market for commodity
X itself.
On the other hand, the partial equilibrium analysis
only uses demand and supply curves. It does not
consider the influence and the connections that exist
between the market for commodity X and the market for
all other commodities in the economy.
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5.2 Usefulness of the General
Equilibrium Model
General equilibrium model shows the
conditions of production in the two nations, the
tastes or demand preference, the autarky point
of production and equilibrium price in the
absence of trade, and the comparative
advantage of each nation. It also shows the
degree of specialization in production with trade,
the volume of trade, the terms of trade, the gains
from trade and the share of these gains going to
each of the trading nations.
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6 Terms of Trade
They are the ratio of the price index of its
exports (Px) to the price index of its imports (PM ).
This ratio is usually multiplied by 100 in order to
express the terms of trade in percentage.
An improvement in a nation's terms of trade is
usually regarded as beneficial to the nation in the
sense that the prices the nation receives for its
exports rise relative to the prices it pays for
imports.
Commodity or net barter, terms of trade (N):
N = (PX /PM )×100
N = (PX /PM ) 100=(100/120 )×100=83
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7 Questions for Discussion
• What do offer curves show? How are they
derived? What is their shape? What explains
their shape?
• What are the forces that push any nonequilibrium-relative commodity price toward
the equilibrium level?
• How is the equilibrium relative commodity
price with trade determined with demand and
supply curves?
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Thank You
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