1. Voluntary Exchange
Econ 10/3

2. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

3. Example of Voluntary Exchange
You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000.
Analysis:
Buyer’ Maximum-
Sellers Minimum-
Price-
Consumer’s Surplus-
Producer’s Surplus-
$20,000
$15,000
$18,000
$2,000
$3,000

4. Surplus
Consumer Surplus is the difference between what you are willing to pay and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for.
PS = Price – Seller’s Minimum

5. The Pearl Exchange There will be four trading sessions.
In each session, you can only buy or sell ONCE.
When you make a deal, shake hands and come to the board to record your negotiated price. Then go back to your seat and record your surplus in the table.
If you do not make a sale or purchase, you take the entire minimum or maximum price for a LOSS.
Are you the best negotiator in the class? Let’s find out.
Good Luck!

6. Supply and Demand Analysis
Easy as 1, 2, 3
Before the change:
Draw supply and demand
Label original equilibrium price and quantity
The change:
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
After change:
Label new equilibrium?
What happens to Price?
What happens to Output (Quantity)?

7. Round 3: Supply of Pearls Decreased
Why? At the original PE there is a shortage
so prices increased P1 PE D o Q Q1 QE

8. Round 4: Demand DecreasedP S
Why? At the original PE there is a surplus
(Qd<Qs) so prices fell PE P1 D D1 o Q Q1 QE