so we're going to begin discussing gains from trade we've already learned that markets are where buyers and sellers come together and we said that in markets prices and quantities are set by supply and demand and our last um chapter we learned that when markets work properly they maximize efficiency which means we get the largest possible total economic surplus remember total economic surplus is producer Surplus plus consumer surplus this lesson we're going to learn how markets generate economic surplus we will learn about the role of prices and we will learn about the power of markets so first how markets increase economic surplus why are markets so great how how does it work that market serve to um make buyers and sellers better off well you think about it lots of goods can be of great value to one person and very little value to another person like a monogram shirt right Brazil it doesn't have your initials on it it's probably not very valuable to you um medicine right you know if it's a medicine might be a medicine that you need to stay alive or have a normal quality of life and it could be a med kind of medicine that would be dangerous for someone else luxury purses right there luxury a lot of um expensive wine as well you know there's some people who really care a lot about them and some people who get no enjoyment at all from them so let's think about what markets do and how this might be related markets reallocate resources to better uses right you have some stuff other people have other stuff you want your stuff more than you want it you want their stuff more than they want it trading makes you both both better off right so for the previous example right if I have some fancy bottle of wine I don't really get any enjoyment out of this fancy bottle of wine I want to find someone who will buy it from me right someone who does care a lot about fancy wine so let's look at a more specific example instead of two people who just have stuff we'll think of two friends Jay and Emil and they go trick-or-treating for Halloween apparently they're not good at it or they live in a very small neighborhood because each of them only gets one item Jay gets one Starburst Amil gets a Reese's cop Jay doesn't like starbu very Starburst very much Amil is allergic to peanut butter so he gets no enjoyment from that Reese's cup he's just going to throw it away so this table right here shows each person's value of each good and we'll say that Jay gets a one has a$1 value on Starburst which means his marginal benefit for one more Starburst is a dollar his willingness to pay for a starburst is $1 Jay has a $5 value on reesei cups he likes those he's willing to pay $5 for those ail enjoys Starburst values it at $3 gets 0 in Reese's again allergic to peanut butter would just have to throw away so initially Jay with his Starburst has a marginal benefit of one his marginal cost is zero he he didn't pay anything for it and so his consumer surplus is one ail his marginal benefit is zero just throws the reesei away marginal cost was also zero so his consumer surplus is zero which means that total economic surplus here is a dollar right the total amount of enjoyment that Jay and ail combined to get from trick-or-treating was $1 Jay and Emil decide to trade so Jay gets races and Emil gets Starburst what is the new Total economic surplus well Jay's marginal benefit is now $5 right he has the REI cup that he likes martial cost and again didn't cost him anything to get they was what trick-or-treating his consumer surplus is five ail's marginal benefit is three he likes the starburst marginal cost zero so Jay's consumer surplus is five aals is three that brings us to an $8 total consumer surplus so noticed what do we see here Jay and Emil are both better off by trading right nobody got ripped off in the trade neither of them were able to walk away me like right I really ripped off that other guy total economic surplus increased so total economic surplus increased that's a great thing that's what we hope to do with technological progress and factories being more efficient and Farms being more efficient well notice this did not require them to work harder or go trick-or-treating more invent a new product or curing those ped that allergy we didn't need any twoology all we needed to do is let Jay and ail trade let both of them get rid of the good they don't value that much and exchange it for a good they value more so what do markets do markets reallocate resources to better uses so think about goods and services maybe you got a a present for Christmas or birthday you didn't like it very much and for whatever reason you know didn't get a gift re with it and so maybe if you can't return it anywhere you might sell it on eBay right that is taking a resource this present you got and reallocating it towards a better use which is giving it to selling it to someone who actually does want this gift um you think about how you know a market like the farmers market works the flowers are allocated from just being in some Farmers field to being in your house and being able you know you have them in a base and displaying them labor involves reallocating tasks to people right that's a the labor market so you think about um door Dash is essentially that is a labor market which that reallocates the task to another person what task the task of driving from a your a restaurant to your house right that is door Dash is generally a task you could do yourself as long as you have a car right you could yourself could drive to the restaurant pick the food up and drive it home but the market allows you to reallocate that task to someone at door Dash and we'll talk later we'll talk a lot more about why it is that you're paying someone at door Dash to do that but that is a task that is reallocated to someone else think about how if you sort of getting a personal assistant what you're doing there is maybe if you're an executive and you have way more stuff than you can do that needs done than you have the time to do it you might pay someone um hire them to reallocate some of your administrative tasks towards them next Marcus reallocate intermediate inputs here's what we mean by that think of something like gold gold is very expensive and one of the reasons it's very expensive is because it's used for so many things right some gold gold can obviously be used for jewelry well there's also some gold in an iPhone and so what a market allows us to do is say all right I've got this gold how do we want to use it and the market steps in and say all right well adal's willing to pay this much for whatever quantity of gold they need you want je rare able to pay for the qu they need and so markets allow us to do the hard work of determining how gold gold Tow also think about how realat purchasing power over so most easiest I think about this is a mortgage right the reason that people get a mortgage is houses are expensive and you don't have the full amount of cash that you need to buy a house all at once when you're buying your first home so instead what happens is the mortgage allows you to pay some money now a big steps in say all right we have all the cash you need so we will pay the cash from the house and then you pay us a time so you we allate your purchasing C you got to get that you know I don't have 300 4,000 whatever how many hundreds of thousands of dollars now but over time I will I can pay you over time now that's does risk so you think about what an insurance company does is it allows you to reallocate your risk to someone else right for me my house burns down couple hundreds of thousands of dollars I don't have hundreds of thousands of dollars to build a new house the insurance company they can definitely afford that they've got a few hundreds of thousands of dollars necessary so essentially what I'm doing is I'm paying them a to take on risk for me so now what we are going to do is look at some application review promps I I like to do this every once in a while because I think I mentioned this before I don't want us to just learn something time then kind of just shove to the back of our mind that have to cran night for an exam so sort of keep looking at um to this we've learned already I also like it when we could take a news article and say oh that relates a lot to what we've done in this SPO course so this first thing is an article about how during uh Co people T there was a there were a lot of people who bought really expensive coffee makers so the art the author of this I believe did one or did made this purchas so I think during Co lockdown and people weren't going out to get coffee as much they invested in higher quality proc systems up their Road well what you see here this article is actually a story of opportunity costs right so think about the opportunity cost of a fancy coffee maker right so buy an expensive coffee maker or what well maybe I would say or I would use the money to go out to night dinner of course during poit lots of people weren't eating out of dinner so you have the money you would have spent on dinner instead you buy a coffee maker so a lot of people had more had more disposable income than they were used to because they weren't sending on travel you needing out so maybe your or what is or a buy coffee maker similarly we can I'll say I going to make a fancy coffee or what or get Starbucks I'm work well during the pandemic the or what wasn't so good anymore right so the it I was not getting Starbucks on my way to work instead it was make fancy coffee or what or drink bad coffee at help right it was either I'm either going to buy this thing and make myself fancy coffee or I'm going to just drink whatever you know I D coffee that I make so notice the opportunity cost of a fancy coffee maker went down cuz again you or what wasn't so great once she couldn't know once you're no longer eating restaurants and your or luck for the coffee itself wasn't so great once you weren't going by once you weren't going out and driving by Starbucks at work so cost and down s the demand for fancy coffee makers increased keep going in the article a gleaming 30 lb stainless steel monster is kicking over my kitchen in the old days I had a modest M for coffee and plenty of space to chop onions now my espresso maker and coffee grinder occupy an entire 2T by 2T stretch stove sign countertop and I lost for more workspace so this is kind of interesting because the author maybe sort of the the the first part of the article that we talked about opportunity cost this stuff often probably good chance she thought about that right she said oh I'm not going out dinner as much I'm actually drinking a lot of coffee at home so it makes sense for me to spend this money on coffee well there's one opportunity cost that you didn't think of counter space is a limited resource right if look you have a house it's very difficult expensive if you want to add more counter space you cter space in your house theyed resource well you have to think about the opportunity cost right I'm going to put my coffee Baker here for what or have more space for chopping onions and general kitchen ront counter space used for a coffee maker can be used for truing dinner like I said adding C is be really expensive so that also means that actually it might be worth it to buy even more expensive coffee maker rooms so and this is something where I actually got as a gift coffee maker one of the sort of things that I looked for in um you know what kind of coffee maker I would like is one that doesn't take up too much counter next question will we bu price floorers put on Market what happens the answer here is B quantity supplied is greater than quanity demanded and so what we can um does that look like well a binding price FL remember a price floor is a minimum price so that's saying you know you have to charge at least five or10 you have to charge at least $10 a gallon for gasoline um and so that's binding because the equilibrium price of gasoline is less than $10 so what we're thinking about then is we're going to be in this region here if it's binding it's going to be above equilibrium it actually has an effect because a floor says you have to be somewhere here well when we're in this region quantity supplied is greater than quantity demanded this is what you have here is a surplus next one supposed the price of crude oil increases and as a result the marginal cost of reducing gasoline increases by a dollar per gallon according to equ model discusting class how would this affect the market F of gasoline okay the answer here is B it will increase but by less than a dollar per gallon take a look at that so when first off when the marginal cost of producing crude oil goes up um the with marginal cost of producing gasoline increases by a dollar per gallon remember that a supply curve is a marginal cost curve and so if the quantity the marginal cost each private shows up by a dollar that mean we're shifting that curve up by a dollar at every price so the it's a vertical shift off so that also remember can think about this so here's we go from S1 to S2 that is a increase in Supply which is what we'd expect right one of the things that shifts Supply are cost and when marginal cost goes up then Supply decreases well notice that our equilibrium s eras some of these marks our initial equilibrium was here and we were at S1 and our new equilibrium is here that's the spot where our supply inter where where our new supply curve intersects demand so Supply was S1 now it's S2 so our equilibrium went from here up to here now here's the important part to note is that the full amount of the shift if the price went up a full dollar it would be up to it would have gone up to here instead what happened is it went up some but only to here basically what happened was the price went up but the basically the consumer and the producer sort of share in how much worse off they are by by the by the price going up right because if the price if the price increased by the full dollar per gallon we would think about well the price up a dollar and consumers paid another dollar so consumers were only consumers but actually theal your price is s but out full amount