CBM 321: International Business and Trade - Module 2

What is the Law of Demand according to economic theory?

The Law of Demand states that there is an inverse relationship between demand price and quantity demanded; as price increases, quantity demanded decreases, resulting in a downward-sloping demand curve.

What is the difference between a movement along the demand curve and a shift of the demand curve?

A movement occurs due to a change in price along the existing demand curve, whereas a shift is caused by non-price factors (such as income, preferences, prices of substitutes/complements, expectations, or number of buyers) shifting the entire curve.

What are the primary determinants that cause a shift in the demand curve?

The determinants of demand are income (normal vs. inferior goods), consumer preferences (tastes, trends), prices of related goods (substitutes vs. complements), expectations (future prices, future income), and the number of buyers (market size).

What is the Law of Supply, and why does its curve slope upward?

The Law of Supply states that there is a direct relationship between supply price and quantity supplied; as the supply price increases, the quantity supplied increases because higher prices incentivize producers to supply more.

What are the key determinants that shift the supply curve?

Supply is determined by technology (automation), the cost of inputs (rising costs decrease supply), the number of sellers (more sellers increase supply), expectations of future prices, and government policies (taxes, subsidies, and regulations).

What defines market equilibrium, and what condition holds at the equilibrium price?

Market equilibrium occurs when opposing market forces of demand and supply exactly offset each other with no inherent tendency for change. At this point, quantity demanded equals quantity supplied ($Qd = Qs$), leaving no shortage or surplus.

How do market surpluses and market shortages affect commodity prices?

A surplus occurs when quantity supplied exceeds quantity demanded ($Qs > Qd$), pushing prices downward. A shortage occurs when quantity demanded exceeds quantity supplied ($Qd > Qs$), driving prices upward.

What is comparative advantage, and what did David Ricardo establish about it?

Comparative advantage is the ability of an entity to produce goods or services at a lower opportunity cost than competitors. David Ricardo showed that free trade benefits all trading partners if they specialize according to comparative advantage, even if one partner has an absolute advantage in all goods.

How does absolute advantage differ from comparative advantage?

Absolute advantage is the ability to produce a good or service at a lower resource cost per unit (using fewer inputs or a more efficient process) than others, and a country can hold an absolute advantage in multiple goods simultaneously.

What is the core premise of the Heckscher–Ohlin Model?

The Heckscher–Ohlin Model states that international trade is driven by factor endowments (labor, land, capital); countries export goods that intensively use their abundant factors and import goods that require their scarce factors.