# Offer Curve Diagram

 Pass mouse over underlined tags to change figure:
Tariff
A   B   A&B

Expansion
A   B   A&B

 Variants:   Inelastic Demand by ... Country A Equil. Tariff Country B Equil. Tariff Both Equil. Tariff Both Very Inelastic Equil. Tariff

## Key:

 X, Y Quantities of goods X and Y OA, OB Initial offer curves of countries A and B OA', OB' Offer curves of countries A and B after shock OT, OT' Price lines for the initial and the new equilibria.
 E The initial equilibrium X0 The quantity of X exported by A and imported by B at E. Y0 The quantity of Y exported by B and imported by A at E.

## Explanation:

The offer curve OA records the quantities of good X that country A supplies to the world market for export and the quantities of good Y that it demands from the world market as imports, for all prices. The prices are only implicit in the diagram, represented as rays from the origin the slopes of which are the prices of good X relative to good Y. This is possible since balanced trade (which is assumed throughout), requires that pY Y = pX X, and therefore that Y/X = pX / pY . Thus the offer curve can be read as giving the quantity of good X that country A is willing to export in exchange for various quantities of imported good Y, or equivalently as the amounts of both X and Y that it is willing to trade at various prices along rays from O.

Offer curve OB is similarly defined for country B, except that the directions of trade for it are reversed. This is why it is something of mirror image of OA. That is, it records quantities of good Y that B will export in exchange for various quantities of imports of good X. In equilibrium, of course, country B must import what A exports and vice versa, which is why equilibrium is found where the two curves intersect, at E.

Offer curves need not be upward sloping throughout. If they are, as drawn in the basic picture above, that says that the country is willing to spend more, in exports, for additional quantities of imports as their price falls (and the relative price of exports therefore rises). If this is true, it means that the demand for imports is elastic, and therefore such offer curves are often themselves called "elastic." If demand for imports instead becomes inelastic at low import prices -- which is possible but not theoretically necessary -- then the offer curve bends back on itself as shown in the variants above. This, as the pictures show, can lead to different sorts of responses of prices and quantities of trade to various shocks.