1. The Magic of Exchange
SUBJECTIVELY: where one
person’s (perceived) trash is another
person’s (perceived) treasure.
2. Pete’s Bat and Sam’s Shoes
Would you consider
exchanging these items?
3. Why (and How) does an
exchange create wealth?
One person’s trash is another’s treasure.
because any one individual’s evaluation
of goods and services is
subjective and
different.
4. The Principle of Exchange
as an application of the
benefit versus cost analysis
People will exchange if they expect to gain more
than they give up --- specifically, if they believe the
expected benefit is greater than their expected cost.
5. These principles refer to
“Voluntary” Exchanges ~
Not Rip Offs!
When agreeing to exchange, both
parties expect to gain
more than they are giving up.
6. The Gasoline Purchase…..
as Rip Off (?)
ex ante ~ Gasoline prices are ridiculous; so international
oil companies are ripping you off!
Did you make the choice to buy the gas?
Why did you buy the gas?
Using marginal analysis, you compared the benefits of
“buying the gas” to the opportunity cost of the using the
funds to “do something else you may have wanted to do”.
If the benefits outweighed the cost! You gained.
nota bene: The gas station owner gained also.
7. When “benefit/cost” doesn’t work
When there is a “lack of information”
When there is “misinformation” (or fraud)
When there is “asymmetric information”
8. Employment as Voluntary Exchange
Employers must gain
Though you say “I hate my job!” (how much)
Use marginal analysis to explain:
Why SF Giants might let Barry Bonds go? Why
might he decide to leave
Why the SF 49ers let Jerry Rice go? Why did he
decide to leave and go to the hated
Oakland Raiders?
9. Education as Voluntary Exchange
You are voluntarily exchanging your money
and contributing your human capital to this
class. Why?
Many high school students don’t expect to gain
from school. How does that affect the nature of
the exchange? TYPE of EXCHANGE(?)
10. Voluntary Exchanges Create Wealth
Wealth is the value people place on their assets ~
both human and non-human.
After a voluntary exchange both parties should
place a higher value on their “after” assets than
their “before” assets. They believe they gave up a
“lesser wealth” for a “greater wealth” something.
Even if only two people voluntarily exchange,
wealth is created.
11. Barter exchanges are inefficient.
Barter– exchanging goods for goods
Must have mutual coincidence of wants
You have to want what I have and I have to
want what you have.
Otherwise we might have to make many
transactions before getting the thing each of
us wants.
12. Transaction Cost
Opportunity Costs are subjective valuations associated
with Searching for the product (search cost)
with Arranging for the exchange
with Agreeing to the terms of exchange
with “Dead Weight Loss”
In an “exchange” your cost is someone’s gain.
With a “Dead Weight Loss” your cost is no one’s gain.
13. Money
A way of exchanging personal resources for
goods and services
You are a carpenter
You exchange your human capital for money
You exchange money for goods and services
thus You exchanged your human capital for
goods and services
14. You provide your human
capital to a firm and the firm
provides you with money.
15. You provide money to the
grocer and you get the goods
and services you desire.
16. Money is a tool for exchanging
resources for goods and services
17. Money minimizes transaction costs
No need for a mutual coincidence of wants.
You sell what you have to someone who wants
it.
You get money.
You use the money to buy what you want.
The person selling what you want does NOT
have to want what you produce.
18. Further reductions of
transaction costs
Credit and debit cards
ATM’s
The Internet
Direct deposit
Posting menus outside restaurants
19. Main Points to Consider
Because peoples’ evaluations of goods and
services are subjective and different, both parties
can benefit from exchange, increasing wealth.
The Principle of Exchange – people will engage
in exchange if they expect to gain more than
they have to give up.
When people voluntarily engage in an exchange
there are no rip-offs = they are efficient?
20. Main Points to Remember
Asymmetric information conditions reduce the
probability both parties will benefit from
exchange transaction.
Transaction costs include
opportunity costs involved with exchange
dead weight losses
search costs
Money facilitates exchange by reducing the
total of the transaction costs incurred.
21. ....DEFINITIONS….
Asymmetric Information Problem: A problem arising
when either buyers or sellers have important action about
the product not possessed by the other side in potential
transactions.
Deadweight Loss: A net loss associated with the forgoing
of an economic action. The loss does not lead to an
offsetting gain for other participants. It thus reflects
economic inefficiency.
