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Chapter 2 Trade and Economic Systems
Self-sufficiency or Trade
The basic economic problem is scarcity. Human wants are unlimited. Resources are limited. The
basic goal in dealing with scarcity is to produce as much consumer satisfaction as possible with
the limited resources available. To achieve this goal, the limited resources must be used as
efficiently as possible. Resource owners must choose how to use their limited resources.
One possible choice is to use the limited resources to practice self-sufficiency. Self-sufficiency
means that you use your limited resources to produce the goods and services that you want to
consume. You consume only what you are able to produce. Self-sufficiency has advantages:
You don’t have to worry about unemployment, since you are self-employed. You have no need
for money, since you are not engaged in trading with others. Inflation is of no concern to you.
The problem with self-sufficiency is that it yields a very low standard of living. A lone person will
have very limited resources and will be compelled to use those resources in production
processes that the resources are not well suited for. Remember when you were stranded alone
on the island (Chapter 1). Computer programming skills are not well suited for catching fish. The
practice of self-sufficiency is not a common choice.
Instead, most resource owners choose to engage in trade. You use your resources to produce
where you have a comparative advantage, and you trade for everything else. A person has a
comparative advantage when he or she can produce a good or a service at a lower opportunity
cost than other producers. Producing according to comparative advantage leads to a more
productive use of resources and a higher standard of living. A more detailed explanation of
comparative advantage is given in Chapter 16.
How does a person know when to engage in a trade? If a person values what he or she is
receiving in the trade more than what he or she is giving, the trade is beneficial to that person.
But what about the other person in the trade? Is one person’s gain another person’s loss? No,
that is the zero-sum fallacy. The second party in the trade must also value what he or she is
receiving in the trade more than what he or she is giving. So when two parties voluntarily engage
in a trade, they both expect to benefit from the trade.
Consumer’s Surplus and Producer’s Surplus
What is the benefit received by the two parties to a trade? The net benefit the buyer receives from
a trade is called consumer’s surplus.
Consumer’s surplus – the difference between the highest price a buyer is willing to pay and the
price actually paid.
Example 1: If a buyer is willing to pay $100 for a concert ticket and the price of the ticket is only
$75, the consumer’s surplus received by the buyer is $25.
The net benefit the seller receives from a trade is called producer’s surplus.
Producer’s surplus – the difference between the lowest price a seller is willing to accept and the
price actually received.
Example 2: If a seller is willing to sell a concert ticket for $60 and the price of the ticket is actually
$75, the producer’s surplus received by the seller is $15.
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The net benefit to both the buyer and the seller in a trade is the sum of the consumer’s surplus
and the producer’s surplus received by the buyer and the seller. The net benefit to society of
having a market available for trading is the sum of the consumer’s surplus and the producer’s
2 - 1 Trade and Economic Systems