Mutual Gains from Voluntary Trade

1
Mutual Gains from Voluntary Trade

• When two people voluntarily agree to exchange
  goods or services, both of them must be made
  better off by the exchange.

2
What Makes Mutual Gains from Trade Possible?

• Different people have different opportunity costs
  for the good or service in question.

3
Comparative Advantage

• The ability to produce a good or service at a
  lower opportunity cost than others

4
Comparative Advantage and Trade

• When people (or nations) specialize in the goods
  and services in which they have a comparative
  advantage, total production rises, and mutual
  gains from trade are possible.

5
Absolute Advantage

• The ability to produce a good or service using
  fewer resources than other producers

6
What is a Market?

• An arrangement which allows buyers and sellers
  to exchange money and goods.

7
Why Do Markets Exist?

• People are not self-sufficient.
• We trade what we make for goods or services we
  need, or for money to buy goods and services we
  need.
• Comparative advantage makes gains from trade
  possible.
• Markets facilitate specialization and exchange.

8
Two Types of Markets

• Output (or product) Markets
• Households are the buyers (or demanders)
• Firms are the sellers (or suppliers)
• Input (or factor) Markets
• Firms are the buyers (or demanders)
• Households are the sellers (or suppliers)

9
The Circular Flow Model
Revenue from Selling Products
Payment for Products
PRODUCT MARKET
Products demanded
Products Supplied
FIRMS
HOUSEHOLDS
Inputs Supplied
Inputs for Production
FACTOR MARKET
Factor Costs
Factor Payments
10
What is a Perfectly Competitive Market?

• A market in which no buyer or seller has the
  power to influence price

11
Why Cant Buyers or Sellers Influence the Price?

• There are a large number of small buyers and
  sellers.

• The output produced by all firms in the market is
  identical.
• Buyers and sellers have perfect information.

12
What are examples of a Perfectly Competitive
Market?

• wheat
• apples
• corn
• potatoes

• lettuce
• beef
• soy
• cabbage

13
An Economic Model of a Market

• A demand curve shows the quantity of a good or
  service that consumers are willing to buy at
  different prices (holding other variables
  constant).
• A supply curve shows the quantity of a good or
  service that producers are willing to sell at
  different prices (holding other variables
  constant).
• Demand and supply work together to determine the
  price at which the good trades and the quantity
  that is traded.

14
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