Why People Trade

1. Why People Trade 1/8/14 by Mr. Garfinkel

2. 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

3. 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?”

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

5. 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.

6. 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. • Other examples?

7. 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) • 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. • Examples?

8. 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?

9. 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?

10. Questions?