Chapter 6 - Exchange, efficiency, and prices. In this chapter students will be able to: Understand why voluntary exchange is mutually beneficial, explain what economists mean by efficiency in exchange and the benefits associated with the promotion of such efficiency, discuss how competitive markets promote efficient distribution of goods between consumers. | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 6: Exchange, Efficiency, and Prices Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Understand why voluntary exchange is mutually beneficial. Explain what economists mean by efficiency in exchange and the benefits associated with the promotion of such efficiency. Discuss how competitive markets promote efficient distribution of goods between consumers. Explore the extent to which price and nonprice mechanisms for rationing goods across consumers serve to promote efficiency. Explain the mathematics behind efficiency in exchange. Economic Efficiency With regard to exchange, economic efficiency represents a distribution of goods across consumers in which no one consumer can be made better off without hurting another consumer. TWO-PERSON EXCHANGE Understand why voluntary exchange is mutually beneficial. Two-Person . | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 6: Exchange, Efficiency, and Prices Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Understand why voluntary exchange is mutually beneficial. Explain what economists mean by efficiency in exchange and the benefits associated with the promotion of such efficiency. Discuss how competitive markets promote efficient distribution of goods between consumers. Explore the extent to which price and nonprice mechanisms for rationing goods across consumers serve to promote efficiency. Explain the mathematics behind efficiency in exchange. Economic Efficiency With regard to exchange, economic efficiency represents a distribution of goods across consumers in which no one consumer can be made better off without hurting another consumer. TWO-PERSON EXCHANGE Understand why voluntary exchange is mutually beneficial. Two-Person Exchange People engage in exchanges (or trades) because they expect to benefit. Voluntary exchange is mutually beneficial, assuming that Fraud has not taken place. Benefit: expectations at the time of the transaction Table The Edgeworth Exchange Box Diagram Edgeworth exchange box: a diagram for examining the allocation of fixed total quantities of two goods between two consumers. Figure - Edgeworth Exchange Box The Edgeworth Exchange Box with Indifference Curves Indifference curves: Negatively sloped Convex Curves farther from the origin are preferred to those closer to the origin Indifference map – shows entire preference mapping Figure – Gains from Trade Gains from Trade Every point inside the shaded area: a market basket for each consumer that is preferred to Basket A (Figure ) Where the marginal rates of substitution differ: mutually beneficial trade between the parties is possible. Final outcome is not uniquely determined. EFFICIENCY IN THE
