Summary Notes-Session 07-Jan 27

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Outline Econ 200Session 7

1.Chapter 4-The process of voluntary exchange between a seller and abuyer: Trade takes place until the mutual gains are exhaustedan example

2.How do we derivethe supplybehavior in pure exchange?

a.The graphical representation of the supply schedule

.Does a seller have a sellers surplus! "sellers rent#?

4.How do we derive the !ar"etsupply curve?

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Readings to be done before Tuesday, Jan. 27: Chapter 4 up to Section

4.4

Readings to be done before Thursday, Jan. 29: Chapter 4 to the end

#roble!s to do $ith your peer group %or on your o$n& 'ro!Chapter 4( )*evie$ +uestions,( nu!bers 1- and in the)#roble!s, section( nu!bers 1 2 a 4-10. /lso relevant is*eading under Filesand then Readings.

n'or!ation about your +ui 3 on riday 5an. 0 is posted on thecourse $ebsite.

n'or!ation about the !aterial 'or your irst Exa! %held on6hursday eb. & is posted on the course $ebsite underAnnouncements.--------------------------------------------------------------------------------

These notes highlight important concepts that are covered in the lectures%They may not coincide exactly with the materials discussed in this particular

session% These summary notes are provided as a sca&old to focus yourlearning%

'ession ($)con *++,hapter -

'ource of .utual gains from exchange,hapter -

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/n Exa!ple(Trevor is shirtless "/# would like to buy a shirt% He values a shirt at 0*+ ".1of the 2rst shirt$$ what he is willing to give up of other goods to ac3uire thisshirt#%

'unil has received and accumulated many shirts on his various birthdays%He values a shirt at + ".1 4 0+#%

Trevor would be happy to buy a shirt from 'unil for anything less than 0*+and 'unil would be happy to get anything from Trevor%

5f 6 4 07+8 Trevor gains 0 $$$$$$ and 'unil gains 0 $$$$$5f 6 4 07*8 Trevor gains 0 $$$$$ and 'unil gains 0 $$$$$5f 6 4 098 Trevor gains 079 and 'unil gains 09%

hat common attribute do all these calculation have in common?

hat is the sum of their gains from trade?6he source o' !utual benet 'ro! exchange is the di8erencebet$een the !arginal evaluations o' a good by di8erent people.

.utual ;ains from Trade:Trade takes place until all the mutual gains from trade are exhausted%

for shirts%9e assu!e that / has no shirts at all. : has 11 shirts.

+uantity ;< %=& 'or / ;< %=& 'or :7 7* *+* 7+ 7@ 7A- A 7-9 - 7*A * 7+( + + AB + -7+ + *77 + +

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Cor :8 the 77thitem has a .1 of +% Cor the 7stitem that :gives up8 /wouldbe willing to pay 07*% 'o the di&erence in .1s is 07* and maximum amountof mutual gains from this trade is $$$$$$$%

The next item is valued by :at 0* ":is willing to give up 0* of other goodsto have this unit#% 5f :is o&ered 0@ for the shirt8 will she give it up and sell itto /?

/values the *ndshirt at 07+% The maximum mutual gains from this trade is0 $$$$$%

The next "@rd# item is valued by :at 0- and by /at 08 so the "maximum#mutual gains from this trade is 0 $$$$%

The -thitem is valued by :at 0A and by /at 0A8 so the gains from tradefrom this exchange are 0 $$$$$$$%

The 9thshirt is valued by :at 0 and by /at 0-% ill this trade take place?

Therefore $$$$$ shirts are to be purchased by /from :%

The total gains from trade are 07*00- 4 0*-%

e conclude that trade takes place until all the gains from trade are

exhausted//

The price! they agree upon may change the distribution of the gainsbetween the buyer and the seller8 but the total gains will be 0*- for any setof mutually agreed prices%

/n i!portant insight about trade(

Trade is mutually bene2cial%

.ore trade is not necessarily preferred by all "to less trade# as some

groups may lose% Cor example8 some groups lose from expansion ofdomestic trade to international trade%

The gains to millions of consumers outweigh the losses to some

groupsE

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>eriving the supply behavior in pure exchange(


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07- worth of other goods8 while she is only willing to give up 07+% ,learly8the @rdbook is too expensive for her to keep so she o&ers it for sale% =nd soon for the rest of the books with lower .1s%

Therefore8 at a market price of 07-8 she keeps "i%e%8 demands# 7 book ando&ers ( for sale%

FGne important point of this exercise is to appreciate that given a marketprice for a good8 a person who owns some 3uantities of this good can be oneither side of the market: buyer andor seller//I

Jow consider another scenario% 'uppose now the !ar"et priceof comicbooks drops to 07*per book% =t a price of 07*8 how many books does.eena demand "in this case8 keep#? 'he demands * books% 'he will o&erthe restthat is8 A books$$ for sale/ hy does she not keep the @ rdbook?'he only values the @rdbook at 07+8 while if she sells it8 she can get 07* for

it% How about the -thbook? 'he values that at 0 while she can get 07* forit% >y the same reasoning she puts up a total of A books up for sale%

Jow suppose the market price changes again% Jow the market price is 07+per book% How many books does she demand "i%e%8 keep#? How many booksdoes she o&er for sale?

Crom our analysis above8 we can build the supply schedule for books .eenao&ers for sale "columns 7 and @ $Table @ below#:

6able - >eriving ;eena@s Supply Schedule

;ar"et #rice per:oo" %=&

;eena@s +uantity>e!anded

;eena@s Auantity o'boo"s supplied

7- 7 (7* * A

7+ @ 9 - -A 9 @- A ** ( 7+ +

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The 2rst and the third column of the table above show the supply schedulefor .eena%Therefore8 if the market price for a comic book is 07-8 she o&ers( books for sale% =t a market price of 07*8 she o&ers A books for sale and soon%

The supply curve "in continuous form# on a graph:

=s 6 rises8 .eena is willing to sell more books/ F'ince she will consume lessof her own endowed good as its price risesI

'ellers rents "also called the producer surplus#:Kust as the consumer has asurplus8 the seller does have a surplus too% The area under the supply upthe 3uantity is the minimum total amount the seller must be paid tovoluntarily o&er the good at that 3uantity for sale%

6able 4-;eena@s Supply behavior

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;ar"et #rice per unit %=& +uantity o' boo"s supplied+ +* 7- *A @ -7+ 97* A7- (

,onsider .eenas supply behavior% 'uppose the market price is 0 per book%How many books does .eena sell?

hat is her total revenue?

hat is the sellers cost? The books are Lust sitting on her bookshelf so isthere any cost to the seller?e do not have a production cost here sinceshe is not producing any book% 5t would look like there is no cost here sincethe books are Lust there in her house% >ut if you look at the supply schedulebelow closely8 you will see that she re3uires 0* to o&er her 2rst book forsale/ =s a seller8 she will JGT sell this 2rst book at 0+8 0%7+8 0%9+8 or 0%(+ or

07%+Ebut she will only o&er it for sale if she is o&ered at least 0*% F6leasenote the asymmetry of behavior as a buyer versus a seller: as a consumershe values her thbook at 0+8 but as a seller8 she will not sell it for 0+%I

To sell the 7stunit "book#8 she re3uires a minimum payment of $$$$$$$$$$$%

F5n other words8 she values the 2rst book$$ that she is ofering or saleat 0*%As a seller8 when she gives up something she values she incurs acost% =nd she values the 2rst unit of the book $$that she is o&ering to sell$$at 0*% 9e denote the cost o' giving up a unit o' a good that a sellervalues as the seller@s ;arginal Cost %;C&.The minimum payment theseller re3uires to be paid in order to give up her 2rst book is her ., ofselling the 2rst book%I

To sell the *ndunit8 she re3uires a minimum payment of $$$$$$$$$$$$

To sell the @rdunit8 she re3uires a minimum payment of $$$$$$$$$$$$

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To sell the -thunit8 she re3uires a minimum payment of $$$$$$$$$$$$

F6lease note: There is some asymmetryof behavior heredue to the use ofdiscreet numbers% =s a buyer8 she values the thbook at 0+8 however8 togive that book up for sale8 she re3uires a payment of 0*% 'he will not sellher 2rst book for 0+%I

The total minimum she re3uires for selling - units is simply the sum of theabovethis is also the 6otal Costof the seller which is the addition of allher .,:

'ince the market price of each book is 08 her 6otal *evenueis:

Jow lets look at her producer 'urplus!/

=t the market price of 08 her 6roducer 'urplus! Malso called sellers rent

$$is:

>erivation o' the ;ar"etSupply Curve(

,onsider two individual suppliers of a good:

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hich one of the following graphs best depicts the .arket 'upply?

>erivation o' the ;ar"et Supply Curve(

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Summary Notes-Session 07-Jan 27

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