Why does trade of any type take place? Illustrate your answer by reference to each of the following:
1.
Market exchange in which price is determined by Demand and supply. (refer in your answer to producer and consumer surplus)
2.
Exchange between two individuals based on differences in tastes given a fixed endowment of two goods.
3.
International trade
Take a shot, why would trade take place. Hint: under trade, both sides are better off.
what does fixed endowment of two goods mean ? that means i have 5 apples and someone else has 5 oranges. but we both cannot buy any additional apples or oranges? and the last option we have is to trade due to difference in taste??
i am abit confused about part 2.
Endownment in economics is the value one places on a certain object...
so in this case, i think fixed endowment just means u wud value the oranges as much as the apples
1. Market exchange in which price is determined by Demand and Supply:
Trade occurs in markets where goods or services are bought and sold. In a market exchange, the price of a good or service is determined by the interaction of demand and supply. Both producers and consumers engage in trade because they can benefit from it. Producers are willing to sell their goods or services at a certain price because it allows them to cover their costs and make a profit. Consumers, on the other hand, are willing to buy the goods or services at that price because they value them more than the money they have to give up.
In this scenario, trade leads to producer surplus and consumer surplus. Producer surplus represents the difference between the price at which producers are willing to sell a good and the price they actually receive. It reflects the benefit that producers gain from selling at a higher price. Consumer surplus, on the other hand, is the difference between the price consumers are willing to pay and the price they actually pay. It represents the benefit that consumers receive from paying less than they are willing to.
Trade occurs because both producers and consumers have a surplus. Producers are willing to sell as long as the price they receive is higher than the cost of production, leading to producer surplus. Consumers are willing to buy as long as the price they pay is lower than the value they place on the good, leading to consumer surplus. Trade allows both sides to capture these surpluses and benefit from the exchange.
2. Exchange between two individuals based on differences in tastes given a fixed endowment of two goods:
In this scenario, trade takes place due to differences in tastes and preferences between individuals. A fixed endowment of two goods means that each individual possesses a certain amount of one good and a certain amount of another good. For example, one person has 5 apples, and the other has 5 oranges. The individuals cannot acquire any additional apples or oranges.
Despite having a fixed endowment, trade occurs because individuals have different preferences for goods. One person might value apples more than oranges, while another might value oranges more than apples. By exchanging their goods, both individuals can satisfy their preferences better. For instance, if the apple owner values oranges more than apples, they can trade some of their apples for oranges with the orange owner. In this way, both sides are better off since they obtain a good they value more.
Trade based on differences in tastes allows individuals to specialize in producing and obtaining goods that align with their preferences. It enables them to diversify and access a wider range of goods than what their fixed endowment alone would provide.
3. International trade:
International trade occurs between countries and is driven by several factors. One of the primary reasons for international trade is the principle of comparative advantage. Comparative advantage means that countries specialize in producing goods or services in which they have a lower opportunity cost compared to other countries.
Countries engage in trade to benefit from the advantages offered by comparative advantage. By specializing in producing goods or services where they have a comparative advantage, countries can produce more efficiently and at a lower cost. They can then export these goods in exchange for goods that other countries produce more efficiently. As a result, both countries can have access to a wider variety of goods at lower prices than if they solely relied on their domestic production.
International trade also allows countries to benefit from economies of scale. By producing for a global market, companies can increase their production levels and achieve greater efficiency, leading to lower costs. Additionally, trade fosters competition, which drives innovation and economic growth.
In summary, trade takes place because it benefits both parties involved. Whether it's market exchange driven by demand and supply, exchange based on differences in tastes, or international trade driven by comparative advantage, trade allows individuals, producers, and countries to specialize, diversify, and access goods or services that they would not have been able to produce or obtain on their own.