Saving "the Market” out of Cambridge: “Pareto Optimality”

 

We call the buying-and-selling in the market “free trade” or “voluntary exchange.” Put it differently, the market is a conceptual venue where the so-called “win-win game” is played. More specifically, no seller would like to “supply the product” at a lower “price” (meaning a benefit: don’t get it wrong) than the marginal “production” cost. No buyer would like, either, to buy the product at a higher “price” (literally) than the marginal utility.

             Lo and behold, the consequence of each and every exchange is a happy ending.

             Now, let us line up all the marginal benefits “as revealed in the market” from the highest to the lowest on one hand; all the marginal production costs from the lowest to the highest on the other hand.

             You’re right, in economics jargon:

1)     The one line-up aka “curve” is called “the demand schedule.”

2)     The other called “the supply schedule.” Both schedules are beforehand, of course.

3)     The clapping point is called “the equilibrium price.”

4)     The area between the demand curve and the price line is called “the consumer surplus.”

5)     That between the supply curve and the price line is called “the producer surplus.”

6)     The whole episode ends up as “Pareto optimality” in the meaning that any change shall result in a loss to one or more of the buyers or sellers.

 

Some key takeaways as usual:

1)     The equilibrium price is specific to the accounting period and can be known ex post. If anything, prices are the consequence. Never buy the snake oil of “recession due to sticky prices” on sale at Cambridge. That simply is reverse causation!

2)     There is no guarantee howsoever that the price applies to individual exchanges. The price is none other than the weighted nominal average of real prices, both ex post.

3)     The demander, the buyer and the consumer are rarely the same. Home is not the market, in the first place. The buyer’s choice is seldom equal to the consumer’s.

4)     The supplier, the seller and the producer are almost never the same. There is nobody who is, for instance, a genuine organic farmer, in the second place. Instead, we have a chain of supply, the length of which depends upon the product and many other things.