LESSON #03A

GENERAL VS PARTIAL EQUILIBRIUM:

NATIONAL SUPPLY AND DEMAND CURVES
ECON103 INTERNATIONAL ECONOMICS A
WONG FOT CHYI WONG FOT CHYI
 Market Demand and Supply
Recall from Review Lessons #01-03:
Market or national demand consumer optimization
Market or national supply producer optimization

D
WONG FOT CHYI
 Market Demand and Supply

WONG FOT CHYI

 General vs. Partial Equilibrium
Partial Equilibrium Analysis or Model considers a single
market in isolation.
But often changes in one market spill over into other
markets, giving rise to income or wealth effects and altering
prices elsewhere that in turn feed back into the market of
interest.
General Equilibrium Analysis or Model views the economy
as a closed system of related markets and study the
equilibrium of all markets simultaneously.
The models are mathematically complex when they allow for
large numbers of individuals, large numbers of goods and
firms, etc.
WONG FOT CHYI
General Equilibrium In A Closed Economy (Autarky)

Two-country, Two-good World

2 countries, say US and Canada, producing and consuming 2
goods, say automobiles (A) and wheat (W)
Producers and Consumers:
Consumers maximize satisfaction or utility, subject to preferences
and budget constraints. [See Review Lessons #01 and #02.]
Firms maximize profit or minimize cost, subject to technology
constraints and quantity produced. [See Review Lesson #03.]
Production with increasing opportunity cost
Autarky self-sufficient country before trade.
Equilibrium tangency point of the PPF and CIC.
The equilibrium point is also the closed economys optimal
production and consumption points.
WONG FOT CHYI
General Equilibrium In A Closed Economy (Autarky)

Recall from our last lesson that the closed economy general
equilibrium is given by:
It is a General Equilibrium model as it
QW
US encapsulates:
ALL product markets: autos and wheat, and
their quantities (QW, QA) and prices (PW, PA)
CICUS BOTH production and consumption:
A
Producer equilibrium at A on PPF:


o MRT = (PA/PW)
Consumer equilibrium at A on CIC:
PPF
o MRS = (PA/PW)
QA

WONG FOT CHYI

General Equilibrium In A Closed Economy (Autarky)

The closed economy general equilibrium for Canada is as shown on

the right:

QW QW
US Canada
CICCanada

PPF
CICUS
A

A


PPF

QA QA

WONG FOT CHYI

Derivation of National Supply and Demand Curves

Let us now derive a partial equilibrium model of national supply and

demand for autos from the general equilibrium model, starting with
the US economy.
QW
US

CICUS
A

PPF

QA

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 QW B
US In autarky in the US, when:Curves
Derivation of National Supply and Demand
Price ratio = (PA/PW)US,0
C C CIC is tangent to PPF at point A
A CICUS (PA/PW)US,2 Production = consumption at
PPF
point A = QA equilibrium
(PA/PW)US,0
B
Price ratio = (PA/PW)US,1 > (PA/PW)US,0
(PA/PW)US,1
Production is at point B with QB
QA Consumption is at point B with
NSUS
QB
(PA/PW)US

QB > QB excess supply

Price ratio = (PA/PW)US,2 < (PA/PW)US,0

(PA/PW)US,1 Production is at point C with QC
B B
A
Consumption is at point C with
(PA/PW)US,0 QC
C
(PA/PW)US,2 QC > QC excess demand
C NDUS
QC QB QA QC QB QA
WONG FOT CHYI

QW QW
B
US Canada
Derivation of National Supply and Demand Curves

C C

A CICUS PPF
,

PPF A

B ,
CICCA


,

QA QA
NSUS NDCA NSCA

B B ,

A
,
C


C NDUS ,

QA QA
WONG FOT CHYI
 Derivation of National Supply and Demand Curves

Hence, in autarky, the domestic or national markets for automobiles in

the US and Canada are as shown in the respective diagrams below:

US Canada
NSUS NDCA NSCA

NDUS
QA QA
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 Deriving Import Demand Curve
Country A
National Supply & Demand Import Demand

P = Autarky equilibrium price for Country A

A FOT CHYI
WONG
 Deriving Export Supply Curve
Country B
National Supply & Demand Export Supply

P* = Autarky equilibrium price for Country B

WONG A
FOT CHYI
Worlds Import Demand & Export Supply in Equilibrium

Country Bs
Export Supply

Country As
Import Demand

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 Derivation of World Supply and Demand Curves
for Automobiles

World

X International TT
M

X=M

QA QA QA

WONG FOT CHYI

 End of Lesson

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