Why People Trade

1/8/14 by Mr. Garfinkel

What is trade?• The exchange of goods and services

• For example, I give you money, you give me a snickers bar.

Me You

• If you are trading goods for goods (there is no money involved in the transaction), that is called “barter”

Me You

Why do people trade?• People decide to trade because they expect to benefit

from it.

• In voluntary trade, both sides can win!

• You may be thinking, “How could both sides win? Doesn’t one person get a better deal than the other person?”

The Concept of “Marginal Utility”• Different things have different worth to different people

o “One man’s trash is another man’s treasure”

• Example: If you were drowning, a life vest would have a very high utility (worth to you). If you were in the middle of a desert, the life vest would have a low utility to you.

Valuable here! Life Vest Not valuable here!

Marginal Utility Continued• Trade works on this same principal!

• In a transaction (trade), the good being sold has a greater utility to the buyer than the money he or she pays for it.

• The money in the transaction has a greater utility than the good to the seller in the transaction.

The Law of Supply• The greater the scarcity of the good (the less common it

is), the higher the price of it. The greater the supply, the lower the price of it.

• For example: if I was to sell 1 homework pass in an auction, it might be the subject of a bidding war, however if I had 20 to give out, it would be far less valuable as it would be much easier to get one.o Other examples?

How traders who don’t produce anything can make money

• You may be wondering, what if something is very plentiful in one place, but non-existent in another? (Example, water next to a lake vs. in the desert)o It might be very cheap in the area where it is plentiful and very

expensive in the area where there is none!

• You could make money buying a good in one place where it is plentiful (cheap) and taking it to an area where it was rare (expensive) and selling it there.o Examples?

Traders making money continued.

• Example: you buy bottles of water in a Chicago Target and take them to the middle of the desert. You could buy them for about $0.25 each and sell them for $3.00 each!

Buy water here… Take it here!

• Other examples?

But don’t forget your expenses!• Of course, you have to consider your expenses in transport!

If they exceeded the difference between your cost and your price, (In this example, $2.75) you would lose money.

• Among the many other potential expenses you may have are any laborers you have to hire to help you and taxes you may have to pay.

• Examples of other expenses?

Questions?