James Saiz : One Red Paperclip and the Benefits of Trade

James Saiz

journeyman of some

One Red Paperclip and the Benefits of Trade

The One Red Paperclip project and the Donald Duck story it reminded Hans Nowak of is a nice example of a key principle in economics: voluntary trade benefits both parties.

Gene Callahan, in his wonderful book Economics for Real People, makes the point that when we trade voluntarily it isn't because we give equal value to what we are receiving and what we are giving—it is because we value what we are receiving more than what we are giving. If we valued them the same, there would be no reason to trade. (Note that I'm not just talking about monetary value.) The exact same thing is true of the other party.

People value things differently, in part because people just have different values but also because of marginal utility. Marginal utility is just the idea that the value to you of something is based on the value of getting it in addition to what you already have. e.g. if you already have enough food to eat, you might not value extra food as much. A second car isn't as valuable as the first. A third even less so. The animal in the Donald Duck cartoon that needed the string for his kite was willing to give up a pocket knife for it but if someone offered him the same deal again 5 minutes later, he likely would have rejected it as the marginal utility of the string had greatly reduced.

Categories: economics

This page last modified Friday 11 November, 2005 by James Saiz
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