PPF - Price of the Trade - Video Tutorials & Practice Problems
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The Price of the Trade
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So now let's talk about the terms for the trade. What is the correct price to set for the exchange? So first off for trade to be beneficial to both trading partners? The price of the trade must lie between my must lie between their opportunity cost. All right. Between the opportunity cost of the two producers. Alright, that is the only way that the trade will be beneficial here. I've got the graphs of you and your friends parties with the hunch punch and the pizza rules and we've got the opportunity costs that we had we had sold for in the previous video, right? We knew who had the comparative advantage in each one, right? Whoever has the lower opportunity cost. But now, how do we say what the trade should be? Right? Should we trade at 100 punch for one pizza roll? Is that fair to hunch punches for one pizza roll. Three hunch punches for one pizza roll. Where is the correct amount of the trade? Okay, so what's gonna happen is we're gonna have a range that is okay for the trade. Anywhere within this range. The trade will be beneficial to both. Where we set ourselves in. This range comes down to some other factors. But first, let's set what the range would be. So remember, it has to lie between the opportunity costs. So the price of the trade in this situation has to lie between one hunch punch and to hunch punches. Right? Let's say the price of the trade was to hunch punches for one pizza roll. Why would you even want to trade. Right, you can already do that yourself? You could be making to hunch punches for one pizza roll without the trade? You would need to be getting something a little better than to hunch punches for one to even consider it, right? You'd want to be getting the 1.5 or something like that. Or even one if you could. But if you wanted one hunch punch for one pizza roll, your friend would say, hey, that's not fair. I I could do that myself, right? My opportunity cost my operation cost is one hunch punch. So that for it to be beneficial to both, it's gotta lie somewhere in between those two numbers. So it would have to be something like 1.5 like we had in our previous example or 1.2 or 1.8. Right? It could be anywhere in this range and it would be beneficial to both parties. It's just where do we end up? So let's see the same thing. If we were talking about the price of the trade for hunch punch. And where saying how many pizza rolls for one hunch punch. Well, in this situation, it would have to lie between half a pizza roll per hunch punch and one pizza roll per hunch punch. Right? Uh, same logic here, you wouldn't want to make the trade unless it was in between that range or both. People wouldn't want to make the trade? Right. So why why was the trade set to 1.5? Uh, hunch punches per pizza roll before? Why did that number come up? Um, well, first off, it was right in the middle, right? So that was one reason it could have ended up there. But there are other other factors that can come into play, right? The supply and demand of pizza rolls and hunch punch. What if pizza rolls are really rare and hunch punch is just everywhere. You can just get hunch punch at any old 7 11. The value of a hunch punch isn't as great, Right? So that could affect where the price the trade would be. How about negotiating power? Just one person is a better negotiator. They might get a trade better in their favor. And the last thing here, equity, they could try and make an equitable trade where everybody is better off. Everyone feels fair about the price and no one feels taken advantage of. Cool. So that is how we set the price for the trade or at least know the range where it's going to be set. All right, let's move on.
