The relation of this chapter to trade theory proper is the same as that of the usual micro-economic chapter on consumer and producer behaviour to overall equilibrium theory. In other words, we develop here the models for supply and demand in one country, while the following chapters fit these into a trade equilibrium model and study its properties.

The analogy is valid in some other respects. One is the technical aspect of choosing the most convenient model. As the ultimate objective of equilibrium theory is to examine how the actions of different price-taking agents fit together, the natural building blocks should use prices as independent variables. This is best done using duality; i.e. modelling consumer behaviour by means of expenditure or indirect utility functions, and producer behaviour by means of cost, revenue or profit functions. The same choices prove convenient for modelling each country in international trade.

The second parallel is in the choice of simplifying assumptions to help us state the vital points with clarity and emphasis. In general equilibrium theory this often involves the use of 7lsquo;representative’ firms and consumers. We will sometimes use these constructs, and begin by commenting on them.

In an economy with several price-taking firms, so long as there are no distortions within the production sector, it is rigorously legitimate to treat the supply as coming from one vertically integrated price-taking firm. The point is simply that profit is a linear expression in the quantities of outputs and inputs, and the sum of its maxima for individual firms equals the maximum over the sum of the firms.