Class Summary 11/2/11

Transaction Costs, Middlemen, and Demand

Transaction Costs; anything that prevents beneficial exchanges and trade

Middleman: someone who has a comparative advantage in lowering transaction costs for producers and sellers

• They get a bad rap, but are extremely common. For example, Wegmans is the ultimate middleman.
• The price is generally higher when you buy from the middleman because you're paying for the convenience, not just the product itself.
• People get rich when they lower transaction costs.

Demand

Exchange can occur in small groups, but we have a world of 7 billion people so that's just not realistic. Firstly, there's a problem regarding information. It's impossible to understand what people want in bigger groups. Secondly, there's a transactions cost problem--there's no way to overcome the immense distance.

Price: information; signals to buyers about what is scarce, and a signal to sellers about what you value

• they steer knowledge in a way that causes order to occur
• prices come from markets--markets are the ether

Markets: any group of potential buyers and sellers

• there are physical, virtual, and betting markets
• any decentralized, unorganized interaction between buyers and sellers
• cause money and non-monetary prices to emerge (usually both in most markets)
• because goal of markets is to produce order--meaning there's stuff on the shelves

Buyers are demanders. In the goods market, households are buyers, and in the factor market the firms are the buyers. Sellers are suppliers. In the goods market, firms are sellers, and in the factor market the households are suppliers.

There's no such thing as perfect competition. In order for markets to work, buyers' and sellers' transactions can't have spillover repercussions on others.

Demand: not an all or nothing concept; a relationship between the amount you wish to obtain and the sacrifices you must make to get it (marginal value)

Quantity Demanded: a plan, a number; amount of a good that buyers are WILLING and ABLE to consume at a particular price

• For example: say you want a Maserati, but you don't have a quantity demand for it because you can't afford it

Law of Demand: other things equal, the quantity demanded of a good falls when price rises (including all three of types of prices)