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Title:

Exchange

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You exchange your human capital for money. You exchange money for goods and ... include search costs. Money facilitates exchange by reducing transaction costs. ... – PowerPoint PPT presentation

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Title: Exchange


1
Exchange
  • Principle 5 Exchange benefits the traders.
  • Standard 12.2. Students analyze the elements of
    Americas market economy in a global setting

2
The Magic of Exchange
  • One persons trash is another persons treasure.

3
Petes Bat and Sams Shoes
4
Sams Bat and Petes Shoes
5
Why does exchange create wealth?
  • One persons trash is anothers treasure.
  • Peoples evaluation of goods and services are
  • subjective and
  • different.

6
The Principle of Exchange (an application of
benefit/cost analysis)
  • People will exchange if they expect to gain more
    than they give --- if the expected benefit is
    greater than the expected cost.

7
Voluntary Exchange No Rip Offs!
  • People will exchange if they expect to gain more
    than they give.

8
The Gasoline Rip Off
  • Gasoline prices are ridiculous international oil
    companies are ripping you off!
  • Did you buy the gas?
  • Why did you buy the gas?
  • Using marginal analysis, you compared the
    benefits of coming to school to the opportunity
    cost of the funds used to buy the gas.
  • The benefits outweighed the cost you gained more
    than you gave.
  • The gas station owner gained also.

9
When it doesnt work
  • Lack of information
  • Misinformation -- fraud
  • Asymmetric information

10
Employment asVoluntary Exchange
  • Employers must gain
  • I hate my job!
  • Use marginal analysis to explain why some people
    would stay at a job they hate.

11
Education asVoluntary Exchange
  • You are voluntarily exchanging your money and
    your human capital for this class. Why?
  • Many high school students dont expect to gain
    from school. How does that affect the nature of
    the exchange?

12
Voluntary Exchange Creates Wealth.
  • Wealth is the subjective evaluation of well
    being.
  • After voluntary exchange, both parties wealth
    should have increased they gave up something of
    less value than they gained.
  • If only two people voluntarily exchange, wealth
    is created.

13
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 we want.

14
Transaction Cost
  • Opportunity costs of facilitating exchange
  • Searching for the product (search cost)
  • Arranging for the exchange
  • Agreeing to the terms of exchange
  • Dead weight loss
  • In exchange, your cost is someones gain.
  • With transaction cost, your cost is no ones
    gain.unless you hire a broker.

15
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
  • You exchanged your human capital for goods and
    services

16
You provide your human capital to a firm the
firm provides you with money.
17
You provide money to the grocer, you get the
goods and services you desire.
18
Money is a tool for exchanging resources for
goods and services
19
Money minimizes transaction cost.
  • No need for 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.

20
Further reduction of transaction costs.
  • Credit and debit cards
  • ATMs
  • The Internet
  • Direct deposit
  • Posting menus outside restaurants

21
Main Points
  • 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 exchange
    if they expect to gain more than they give.
  • When people voluntarily exchange, there are no
    ripoffs.

22
Main Points
  • Asymmetric information reduces the probability
    that both parties will benefit from exchange.
  • Transaction costs
  • opportunity costs involved with exchange
  • dead weight losses
  • include search costs
  • Money facilitates exchange by reducing
    transaction costs.
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