Week 2 -- Bilateral Trade

The coconut / fish example we covered in class is a good example of some of the benefits of bilateral trade. We call it bilateral because there are only two parties involved; we’ll eventually get to multilateral trade, which has multiple buyers and multiple sellers. Don’t worry, it’s not that hard…

But we start here first.

First condition; A buyer’s Willingness to Pay (WTP) must be at least as high as a seller’s Willingness to Sell (WTS) – in English, this is the same thing as saying the buyer must be willing to spend at least the bare minimum the seller wishes to sell for. If the buyer values the thing more than the seller, then the buyer can buy and both people can be better off.

And that’s it. Concept’s easy, right? The amount of ‘better off’ is called surplus, and we generally measure this with something called utility, which is a measurement of happiness in dollars. Yes, you read that right; the economists measure happiness in dollars and cents.

Notice the price that's agreed on allocates the surplus between the two parties, but note that this price will create the same amount of surplus no matter what, as long as it's between the seller's bare minimum price (WTS) and the buyer's highest price (WTP). We'll go over this on Saturday in more detail.