Theme 1 - Gains from trade Flashcards
What is the difference between valuation and utility?
Valuation: how much you would be willing to pay for an object, expressed in $
Utility: abstract concept reflecting the satisfaction an individual derives from an activity; how willing you are to consume a product. It varies for everyone.
What is the free trade condition?
C (willingness to accept) <= P <= V (willingness to pay)
What is the buyer’s and the seller’s valuation?
A buyer’s valuation (V) is the maximum amount of money he is willing to pay.
Synonym: “willingness to pay”
A seller’s valuation (C) is the lowest amount of money she is willing to accept in order to give up an item.
Synonym: “willingness to accept”
What is total valuation?
V(q) willingness to pay for q units
C(q) willingness to sell for q units
Why do we need to “reason at the margin”?
Because it’s MV(q) and MC(q) that matters when deciding how much to buy and sell
How do we calculate MV(q) and MC(q)?
MV(1) = V(1) - V(0)
MV(2) = V(2) - V(1)
etc., same thing for MC(q)
What is an efficient trade?
- no waste
- all beneficial trades have been made
- people are better off after the trade
Why do trades take place?
Because people value the same things differently
Do prices have an impact on total gains from trade?
No, prices have no impact on total gains from trade as long as a trade takes place
Is more trade always better? When will the trade stop?
No, trade will stop when MV = MC, it is also the point of efficiency.
