Show Me The Money! (Part 3)

(This post is part of a multi-post thread, and is in response to Part 2.)

Show Me The Money: Economics Of Exchange

In this post, we are going to go a bit abstract and broad in order to set the groundwork for subsequent posts, so please bear with me (and feel free to ask questions in the comment area).

Economics Of Exchange: Spicy Chicken Sandwich

Four years ago, I would often go to Carl's Jr. and order a delicious Spicy Chicken Sandwich (SCS) for only $1 [although I still do but the SCS is now a lot smaller so I go a lot less]. Oh, how I loved the SCS - and at only a buck, WHAT A DEAL! After all, I value the SCS at about $2.50 (meaning I would be willing to pay as much as $2.50 for it) - this means that I am getting a consumer surplus (what I value the SCS at minus actual price) of $1.50.

Now let’s say that I develop Gastric Reflux Disease and cannot handle spicy food anymore, heaven forbid, without experiencing excruciating heartburn. Suddenly a SCS is not nearly as enticing; in fact, I now value it at only 25 cents. This means that for my spicy hot sandwich I am only willing to pay (I only value it at…) 25 cents. Therefore, every time I go to Carl's Jr. I would not purchase a SCS because I value my $1 more than the value I would receive from the sandwich (which is now only 25 cents). At any amount of money above my 25-cent mark, I would not buy, but if they were selling it at 25 cents or less, I would then feel that it is a good deal and would then be willing to buy one.

Economics Of Exchange: Value for Value

Believe it or not, my minions, you make decisions like this every day - mostly subconsciously. Really think about it … Why did you do you get BLANK Consumer Good for $BLANK? The first Spicy Chicken Sandwich example enables us to boil down exchange to the very root: value ($) in exchange for value (SCS). My viewpoint: I value my $1 less than I value Carl's Jr.'s SCS, therefore I am willing to give up the value I would have with my $1 in exchange for the value I would gain from Carl's SCS [$ (less than sign) SCS]. Carl's Jr.'s viewpoint: I (Carl) value my SCS less than I value your $1, therefore I am willing to give up the value I would have with my SCS in exchange for the value I would gain from your $1 [$ (greater than sign) SCS].

In the heartburn example the actual sandwich didn't change - it still had a spicy and juicy breaded chicken fillet, mayonnaise, crisp green lettuce, all in between a sesame seed bun. The ONLY thing that actually changed was the amount of value I placed on the sandwich - its perceived value - how I viewed the sandwich and how much I would gain from it. That is exactly how exchange works, everyone values everything differently – and somehow we all are able to make trading decisions based on that knowledge.