Jim Whitney Economics 311
 
Deriving "General Equilibrium" Supply and Demand Curves: Results

    Every possible free trade price ratio (p) determines the economy's optimal production and consumption points.
    Optimal production points (Qs) come from the tangency between the PPF and the highest attainable free trade budget line.
    Optimal consumption points (Qd) come from the tangency between the free trade budget line and the highest attainable social indifference curve.
    These tangency points can be used to derive "general equilibrium" supply and demand curves. As an example, points have been plotted for p1.
 
 
 
 

 

    To do: Continue the derivation for two more possible price ratios:
    pa: the autarky price ratio
    p2: the price ratio which makes U' attainable by exporting A.

    Then, in the bottom diagram, connect the points to complete the illustration of the economy's general equilibrium supply and demand curves.