Trade and surplus?

Question

When two individuals trade two goods, they both end up being better off as a result of the transaction. Explain how this can be possible, in spite of the fact that the exchange itself creates nothing new (the goods being traded are still the same as they were before being traded). Can someone give me an example.

Answer 1

Its got to do with optomizing the efficiency of each party.  So its no suprise that you are puzzled, because your first sentence is not necessarily true.

For it to be true, there must be some difference in the ability of each individual to produce the two goods.

The classic example is person A can make 2 shirts or 3 hats in one hour.   Person B can make 6 shirts or 4 hats in an hour.   Should they trade?

The answer is yes.  Even though B is better at both shirts and hats, both of them are better off if they both produce something.   Logically its sometimes hard to see, because why have the less efficient person make anything at all?  Well, if you don't you only have the product of B.  If they both work, they split the product of B and A in a way that is determined by their relative productivity.

So each is to produce what they have comparative advantage to produce.  You get that by translating the cost to produce each product using the other product when produced by the same person.  Its like the opportunity cost of making one product in terms of the other product.

Each hat costs A 2/3 of a shirt to produce

Each shirt costs A 1 1/2 hats to produce

Each hat costs B 1 1/2 shirts

Each shirt costs B 2/3 of a hat

So A is better at making hats than shirts

and B is better at making shirts than hats

So if there is unlimited demand for both and they both cost the same, B makes shirts and A makes hats

How do they come out?

they each work 10 hours:

A makes 30 hats

B makes 60 shirts

They trade even up for half of A's hats

A has 15 hats and 15 shirts

B has 15 hats and 45 shirts

If they went it alone:

A would have had to work 7.5 hours to make the 15 shirts and 5 hours to make the 15 hats for a total of 12.5 hours of labor.  A saved 2.5 hours of labor making only hats

B would have had to work  7.5 hours to make 45 shirts and 3.75 hours to make 15 hats for a total of 11.25 hours of labor.  So B saved 1.25 hours of labor making only shirts.

Hope this example isn't too complicated.  If you vary the prices of hats and shirts, you still find these examples to hold if there is demand for both products by both producers.  Its just more complicated to calculate comparative advantage.

Answer 2

If the 2 good are money and a TV...someone got the money they want and the other got the TV...

If its ice cream for a soda...someone wanted the ice cream and is happy

someone wanted the soda and is happy