TRADE LEADS TO GAINS
PRODUCERS AND CONSUMERS TRADE BECAUSE THE EXCHANGE
MAKES BOTH PARTIES BETTER OFF.
LEARNING OBJECTIVE
EXPLAIN WHY PARTIES TRADE.
KEY POINTS
• THE BENEFIT OF EXCHANGE TO PRODUCERS IS MEASURED BY
THE PROFIT THE PRODUCER MAKES. THE BENEFIT OF EXCHANGE
TO A CONSUMER IS MEASURED BY NET UTILITY GAINED.
• CONSUMER SURPLUS IS THE MONETARY GAIN OBTAINED BY
CONSUMERS BECAUSE THEY ARE ABLE TO PURCHASE A
PRODUCT FOR A PRICE THAT IS LESS THAN THE HIGHEST PRICE
THAT THEY WOULD BE WILLING TO PAY.
• PRODUCER SURPLUS IS THE AMOUNT THAT PRODUCERS BENEFIT
BY SELLING AT A MARKET PRICE THAT IS HIGHER THAN THE
LEAST THAT THEY WOULD BE WILLING TO SELL FOR.
• AN ALLOCATION OF RESOURCES )IS PARETO EFFICIENT WHEN IT
IS IMPOSSIBLE TO MAKE ANY ONE INDIVIDUAL BETTER OFF
WITHOUT MAKING AT LEAST ONE INDIVIDUAL WORSE OFF.
, KEY TERMS
UTILITY
THE ABILITY OF A COMMODITY TO SATISFY NEEDS OR WANTS; THE
SATISFACTION EXPERIENCED BY THE CONSUMER OF THAT
COMMODITY.
CONSUMER SURPLUS
THE DIFFERENCE BETWEEN THE MAXIMUM PRICE A CONSUMER IS
WILLING TO PAY AND THE ACTUAL PRICE THEY DO PAY.
PRODUCER SURPLUS
THE AMOUNT THAT PRODUCERS BENEFIT BY SELLING AT A MARKET
PRICE THAT IS HIGHER THAN THE LOWEST PRICE AT WHICH THEY
WOULD BE WILLING TO SELL.
PRODUCERS AND CONSUMERS TRADE BECAUSE THE EXCHANGE
MAKES BOTH PARTIES BETTER OFF. THE BENEFIT OF EXCHANGE TO
PRODUCERS IS MEASURED BY THE AMOUNT OF PROFIT – THAT IS, THE
DIFFERENCE BETWEEN THE AVERAGE COST OF PRODUCING AN ITEM
AND THE PRICE RECEIVED FOR THAT ITEM. THE B ENEFIT OF
EXCHANGE TO A CONSUMER IS MEASURED BY NET UTILITY GAINED.
THIS IS MEASURED BY TAKING THE DIFFERENCE BETWEEN THE
MAXIMUM PRICE A CONSUMER IS WILLING TO PAY AND THE ACTUAL
PRICE THEY DO PAY. TO UNDERSTAND THIS, IMAGINE PURCHASING A
CAR. YOU WOULD BE WILLING TO PAY UP TO $15,000 FOR A CAR IN
GOOD CONDITION, BUT YOU ARE ABLE TO BUY ONE FOR ONLY
$12,000. SINCE YOU VALUE THE CAR AT $3,000 MORE THAN YOU PAID
FOR IT, $3,000 IS THE BENEFIT THAT YOU GAINED FROM THE
TRANSACTION.
2
PRODUCERS AND CONSUMERS TRADE BECAUSE THE EXCHANGE
MAKES BOTH PARTIES BETTER OFF.
LEARNING OBJECTIVE
EXPLAIN WHY PARTIES TRADE.
KEY POINTS
• THE BENEFIT OF EXCHANGE TO PRODUCERS IS MEASURED BY
THE PROFIT THE PRODUCER MAKES. THE BENEFIT OF EXCHANGE
TO A CONSUMER IS MEASURED BY NET UTILITY GAINED.
• CONSUMER SURPLUS IS THE MONETARY GAIN OBTAINED BY
CONSUMERS BECAUSE THEY ARE ABLE TO PURCHASE A
PRODUCT FOR A PRICE THAT IS LESS THAN THE HIGHEST PRICE
THAT THEY WOULD BE WILLING TO PAY.
• PRODUCER SURPLUS IS THE AMOUNT THAT PRODUCERS BENEFIT
BY SELLING AT A MARKET PRICE THAT IS HIGHER THAN THE
LEAST THAT THEY WOULD BE WILLING TO SELL FOR.
• AN ALLOCATION OF RESOURCES )IS PARETO EFFICIENT WHEN IT
IS IMPOSSIBLE TO MAKE ANY ONE INDIVIDUAL BETTER OFF
WITHOUT MAKING AT LEAST ONE INDIVIDUAL WORSE OFF.
, KEY TERMS
UTILITY
THE ABILITY OF A COMMODITY TO SATISFY NEEDS OR WANTS; THE
SATISFACTION EXPERIENCED BY THE CONSUMER OF THAT
COMMODITY.
CONSUMER SURPLUS
THE DIFFERENCE BETWEEN THE MAXIMUM PRICE A CONSUMER IS
WILLING TO PAY AND THE ACTUAL PRICE THEY DO PAY.
PRODUCER SURPLUS
THE AMOUNT THAT PRODUCERS BENEFIT BY SELLING AT A MARKET
PRICE THAT IS HIGHER THAN THE LOWEST PRICE AT WHICH THEY
WOULD BE WILLING TO SELL.
PRODUCERS AND CONSUMERS TRADE BECAUSE THE EXCHANGE
MAKES BOTH PARTIES BETTER OFF. THE BENEFIT OF EXCHANGE TO
PRODUCERS IS MEASURED BY THE AMOUNT OF PROFIT – THAT IS, THE
DIFFERENCE BETWEEN THE AVERAGE COST OF PRODUCING AN ITEM
AND THE PRICE RECEIVED FOR THAT ITEM. THE B ENEFIT OF
EXCHANGE TO A CONSUMER IS MEASURED BY NET UTILITY GAINED.
THIS IS MEASURED BY TAKING THE DIFFERENCE BETWEEN THE
MAXIMUM PRICE A CONSUMER IS WILLING TO PAY AND THE ACTUAL
PRICE THEY DO PAY. TO UNDERSTAND THIS, IMAGINE PURCHASING A
CAR. YOU WOULD BE WILLING TO PAY UP TO $15,000 FOR A CAR IN
GOOD CONDITION, BUT YOU ARE ABLE TO BUY ONE FOR ONLY
$12,000. SINCE YOU VALUE THE CAR AT $3,000 MORE THAN YOU PAID
FOR IT, $3,000 IS THE BENEFIT THAT YOU GAINED FROM THE
TRANSACTION.
2
