《micro_for_trade (optional)》.pdf

Microeconomics for International Trade Theory ECON0301/2252 Basic Trade Model 飦 General equilibrium 飦 multiple agents (firms and consumers) all optimizing 飦 The aggregation problem: no inconsistency between aggregate and individual level decisions 飦 One shot environment 飦 a static model 飦 income=expenditure = balance of trade 飦 Market structure 飦 Constant returns to scale, perfect competition 飦 Variable returns to scale, market power (new trade theory in 80s; new new trade theory in this past decade) Basic Prerequisites 飦 Preference: Consumer Theory 飦 Technology: Producer Theory 飦 Market Structure: Perfectly Competitive Market 飦 General Equilibrium I: Consumption Theory 1. Consumer鈥檚 problem 1.1. Marginal rate of substitution (MRS) 1.2. MRS = relative price 2. Measurement of Utility 2.1. Cobb-Douglas utility function 2.2. The Aggregation problem Consumer鈥檚 Problem 飦 Consumption choice problem max 饊亪 肀? 肀 subject to 肀 肀 + 肀 肀 鈮 饊€ 肀?肀 肀 肀 飦 Equalization of marginal utility per dollar MU MU MU P x y x x 飥斤儧 P P MU P x y y y Marginal rate of substitution = relative price 飦 Results: Demand functions 鈭 鈭 肀 = 饊€ (肀 , 肀 , 饊€? and 肀 = 饊€ (肀 , 肀 , 饊€? 肀 肀 肀 肀 肀 肀 Marginal rate of substitution (MRS) 飦 Change in utility 飩禪 (x, y) 飩禪 (x, y) dU 飥 dx 飥 dy 飩秞 飩秠 飦 Along an IC