Class Twenty Six

Transactions cost

Definition:

It is the cost of the original and negotiating contrast agreement.

There are many ways to minimize the transaction cost

Type of transaction cost

1. physical cost: distance. China has some goods and people in Europe trade with China by ship or land.

2. Ignorance: information. Ebay reduce the cost. Internet is the one way that reducing the cost. People got information they want from searching on it.

3. interference:

Middleman:

Anyone who gets buyers and sellers together to let them trade with each other.

Common middleman work: Wegmens. Apple is the same as the farmer’s. but it is more expensive. Why wegmens reduce your transaction cost? You cannot find the farmer at the first place. Then they may not sell you the apple. Wegmens just provide us the market place to trade by reducing the transaction cost.
They find a way to bring buyers and sellers together, and in doing so they substantially reduce transactions costs and therefore encourage trade. These middle men DO produce something of value, they happen to have a comparative advantage in generating information with low opportunity cost. 

Demanded supply:

Specialize.

Why do we need market:

1. In small group, information is easy to obtain. Problem is easy to overcome.

2. in large society, you won’t care some of the problems. You won’t care about what a stranger is thinking about you

Prices: what is it and why is it important?

What did $1.98 tell us:

1. tells the buyer scarcity.

2. Value of the goods.

Market

Goods market: Products that consumer buys

Everything in goods market we learned is the same as the factory market, labor market or any other market systems.

Prices drop our from the market process.

What is market: any collection of buyer and seller.

Virtue place. (Actual buyers and sellers)--Physical place(farmers’ market); stock market(stock trade);

Intrade. 

All markets have potential buyers and sellers.

E.g.: no one bought a watch last week. But we may buy it some day when shopping. So we are all the potential buyer of a watch.

It is any decentralized, unorganized, interaction between potential buyers and sellers.

What does market do?

Market—prices emerse—to produce order

Price emerse:

1. $3 of pizza. The price emerses in the pizza market to make the order. Buyer want cheaper pizza. The price produces the order because if it is $9, no one would go; if it free, everyone goes.

2. Non-money price: health care is free in many countries.

3. both money and non-money prices: we paid tuition to U of R. but the access to get into the school is non-money price, like SAT and paper to get the admission.

People who interact to produce the price

1. Buyer is called demander:

Good market: Household

Factory market: firms

2. Seller is called supplier:

Good market: firms

Factory market: Household