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eBay is one of the most famous sites on the Internet (http://www.ebay.com; Figure 5.1 "The eBay Home Page"). It was founded in 1995 and is now a very large company, with $60 billion in sales in 2009 and over 90 million active users worldwide.See eBay Inc., “Who We Are,” accessed February 24, 2011, http://www.ebayinc.com/who. One of the many ways in which the Internet is changing the world is that there are now ways of buying and selling—such as eBay—that were completely unavailable to people 20 years ago.
Figure 5.1 The eBay Home Page
In or around the second and third centuries BCE, the island of Delos, in Greece, was a major center of trade—both of goods and slaves. At its height of activity, Delos, an island of five square kilometers, had a population of about 25,000 people.MyKonos Web, “History of Delos,” accessed January 25, 2011, http://www.mykonos-web.com/mykonos/delos_history.htm. This means Delos was about as densely populated as modern-day cities such as Istanbul, London, Chicago, Rio de Janeiro, or Vancouver. Visitors today see different things when they visit the ruins of Delos. Some see dusty pieces of shattered rock; others see the remains of a great culture. An economist sees the ruins of a trading center: a place where people such as the trader shown in Figure 5.2 "A Trader in Delos" were, in a sense, the eBay of their times.
Figure 5.2 A Trader in Delos
Delos and eBay are separated by almost two and a half millennia of history, yet both are founded on a basic human activity: the trading of goods and services. How basic? Consider the following.
Trade has played a central role in determining where many of us live today.
Much of economics is about how we interact with each other. We are not alone in the economic world. We buy goods and services from firms, retailers, and each other. We likewise sell goods and services, most notably our labor time. In this chapter, we investigate different kinds of economic interactions and answer two of the most fundamental questions of economics:
The chapter falls naturally into two parts corresponding to these two questions. We begin by thinking about the ways in which individuals exchange goods and services.
In modern economies, most trade is highly disintermediated. You usually don’t buy a good from its producer. Perhaps the producer sells the good to a retail store that then sells to you. Or perhaps the good is first sold to a wholesaler who then sells to a retailer who then sells to you. Goods are often bought and sold many times before you get the opportunity to buy them.Such transactions are the focus in Chapter 6 "Where Do Prices Come From?" and Chapter 7 "Why Do Prices Change?". For the moment, however, we have a different emphasis. We do not yet get into the details of retailing in the economy but instead focus on trade among individuals—the kind of transaction that you can carry out on eBay and craigslist.
Specifically, we want to understand how potential buyers and sellers are matched up. We also want to know what determines the prices at which people exchange goods and services. Broadly speaking, prices can be established in the following ways.
Take-it-or-leave-it offers are the most common form of price-setting in retail markets. The prices displayed in your local supermarket can be thought of as thousands of take-it-or-leave-it offers that the supermarket makes to you and other shoppers. Whenever you go to the supermarket, you reject most of these offers (meaning you don’t buy most of the goods on display), but you accept some of them. Take-it-or-leave-it offers also occur when individuals trade. Classified advertisements in newspapers or on Internet sites like craigslist typically involve take-it-or-leave-it offers.
Once we understand how individuals trade with one another, we turn to an even more basic question: why do we trade? Whether we are talking about first graders swapping Pokémon cards, the purchase of a camera on eBay, the auction of a Renoir painting at Sotheby’s, or traders in the Mediterranean islands over two millennia ago, there is one reason for trade: I have something you want, and you have something I want. (In many cases, one of these “somethings” is money. Keep in mind, though, that people don’t want money for its own sake; they want money to buy goods and services.)
We therefore explain how differences in what we have and what we want provide a motive for trade and how such trade creates value in the economy. Then we go deeper. In a modern economy, trade is an essential part of life. We consume a large number of goods and services, but we play a role in the production of very few. Put differently, modern economies exhibit a great deal of specialization. We carefully investigate how specialization lies right at the heart of the gains from trade.