Transactions costs: anything that prevents beneficial transactions from taking place
how to mitigate or even eliminate transactions costs? Middleman
Middleman has a comparative advantage in lowering transactions costs for customers and producers. Middleman brings buyers and sellers together.
Classic middleman in modern economics: Supermarkets
apples in supermarket are a lot more expensive than those in orchid, but actually supermarket reduces the potential transactions costs for us to go to the orchid to get the apples.
What's the difference between a world with 7 billion people and one with 200 people?
(1)Information problem
(2)Transaction costs. The physical distance is big in large community.
Where is price from?
Price is an information; a signal to buyers about what is scarce, to sellers about what customers value.
Markets: any group of potential buyers and sellers. Any decentralized, unorganized interaction between potential buyers and sellers.
When having a market, one of the two or both will emerge
(1)Money price (2)Non-money price
the goal of market is to produce order
(1)Money price can ration the allocation of products.(He who can make the highest offer can get what he wants)
(2)Non-money can also allocate the product.
Example: Medical care in some countries are free, but even though patients don't have to pay, they have to wait, which is the non-money ration.
(3)There is a blend of money cost and non-money cost
Example: university tuition is high but there are still more demand than supply, so there are other non-money factors that can allocate the degree, such as quality.
Buyers Sellers
Demanders Suppliers
Goods market Factors market Goods market Factor
households firms firms households
The claim that market can only work well in perfect competition is false.
(1) Without enough information, market can still run well.
(2) It's impossible that all the products are identical
(3) Market doesn't have to have a lot of suppliers. For example, Tiger Woods himself changed the whole golf sports.
What makes demand&supply work well
When you and I are in a transaction, there is no spillover effect to other people.(My behavior won't change another's choice)
Demand: a relationship between the amount you wish to obtain and the sacrifice you must make to get it
Quantity demanded: (a plan) (a number) An amount of goods that buyers are willing (Preferences) and able (Constraints) to consume at a particular price.
The law of demand: when other things equal, the quantity demanded falls when price goes up.
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