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Pastimes : Austrian Economics, a lens on everyday reality
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To: Don Lloyd who wrote (260)11/10/2003 5:59:30 PM
From: gpowell  Read Replies (2) of 445
 
An individual decision to acquire a good is a demand for that good. An individual decision to sell a good is a supply of a good. An exchange occurs when the buyer and seller agree on a transaction consideration, or price.

In aggregate, price is a function of the demands made by all buyers and the supply provided by all suppliers. In a free market, the price will be determined by marginal demand and marginal supply, i.e. price adjusts until marginal demand equilibrates with marginal supply.

The benefits of exchange are maximized where marginal supply equilibrates with marginal demand. Consider that if a condition existed where someone could benefit from an exchange without lowering someone else’s welfare, then the exchange will likely occur. If it does not then this market is said to be inefficient.

The condition whereby no one person’s welfare can be improved except by lowering another person’s welfare is known as Perato efficiency. Markets where transactions occur freely are perato efficient.
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