séance 1 Flashcards
what is the definition of trade?
Trade is a voluntary act between two parties, each giving something to the other in exchange for something else in return
T or F: parties involved in a trade are always better off after the trade than before
yes because they have both agreed to it
what does utility represents?
Represents the satisfaction an individual derives from an activity – measure how better off (related to satisfaction)
what are the advantages of the notion of utility?
- takes the context into account (rich vs poor)
- considers things other than just money
what are the drawbacks of the notion of utility?
- difficult/impossible to measure
- subjective
what is the definition of buyer valuation (V)?
largest amount the buyer is willing to pay to obtain a given object
what is the alternative terminology of buyer’s valuation?
willingness to pay
what is the advantage of valuation?
it is measurable: it is monetary and measurable representation of utility
TF: valuation is an absolute notion
F: it is not an absolute notion: it is subjective and different for everyone
what is the definition of seller’s valuation? (C)
smallest amount the seller will accept to get rid of the object
what is seller’s valuation related to ?
it is related to the cost to the seller (cost of obtaining the object, opportunity cost, etc)
what is the alternative terminology of seller’s valuation?
willingness to accept or reservation price
what is the free trade condition?
C =< P =< V
TF: if P
F: the buyer refuses to buy if P>V
TF: if P
V
what can we say about the individuals concerned in a free trade?
neither agent can be forced to take part in the trade
what are the gains from trade of the buyer? (surplus)
V-P
what are the gains from trade of the seller? (surplus)
P-C
what are the total gains from trade equal to?
V-C
TF: total gains from trade are dependant of P
F: total gains from trade are independent from the price
TF: the more 2 ppl differ from their valuation of a good, the more gains are made from the trade
T
what is the definition a buyer’s total valuation? V(q)
it is the willingness to pay to obtain q units of the good
what is the definition of a buyer’s marginal valuation? MV(q)
it is the willingness to pay to obtain one extra unit of the good (valuation of an additional unit)
how to compute MV(q)?
MV(q) = V(q) - V(q-1)
a buyer will buy units of a good as long as…
MV(q) > P
we say that to know how many units are traded, we need to compare MV and P. what is called that kind of reasoning?
thinking at the margin
what does the surface sous la courbe of MV represents?
it represents the valuatin
what is the definition of seller’s marginal cost? (MC)
it is the willingness to accept in exchange of q units of the good: minimum amount necessary for the seller to sell one more unit of the good
how to compute MC?
MC(q) = C(q) - C(q-1)
a buyer will sell units of a good as long as…
MC(q) < P
TF: as a seller, you want to maximize the nb of items sold
F: you want to maximize profit, not the nb of items sold
TF: thinking at the margin always gives the result of a maximized profit (surplus)
yes
how can we compute total gains from trade from the graph?
aire sous la courbe entre MV(q) et MC(q)
what is the definition of an efficient situation (pareto)?
a situation is efficient if it is impossible to make someone better off without making someone else worse off
what can we say about surplus at the efficient, optimal amount of goods traded?
profit (surplus) is maximized
when the situation is efficient, the point of maximal surplus is …
goods must be traded until MV(q) = MC (q); which is the optimal amount of trade
TF: efficiency is related to the price
F: efficiency is related to a qty traded, not a price
what is the distinction between valuation and value
- valuation: subjective, related to individual preferences and production possibilities
- value: objective, resulting from a market process
