VOLUNTARY EXCHANGE

Voluntary Exchange in a Market Economy

A market economy is one based on capitalism, where goods and services are freely exchanged
on an open market. The Value of the outputs, most often characterized in terms of a Price, is
determined solely by Market Interaction between producers and consumers, a concept known
as voluntary exchange. One of the key principles of a market economy is the principle of
voluntary exchange.

VOLUNTARY EXCHANGE

Is the process of willingly trading one valuable commodity (good,

service, or resource) for another.

Voluntary exchange is the foundation of market transactions

KEY CONCEPTS
Market transactions rely on voluntary exchanges.

Buyers voluntarily trade money for goods and sellers voluntarily trade goods for
money.

Neither buyers nor sellers are forced to engage in the exchange.

Buyers or sellers exchange freely and of their free will.

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Principle of Voluntary Exchange

The principle of voluntary exchange is based on consumers and producers acting in their
self-interest. A voluntary exchange between a consumer and a producer makes both
parties better off than they were before the exchange. For example:

If you own a tulip farm and sell tulips at a farmer's market, you are voluntarily
exchanging your time and expertise for money, and consumers are exchanging money
for your goods and services. Both parties, you and the consumers, are better off because
of the exchange.

Say you choose to continue your education and earn a master's degree. In this case, you
are voluntarily exchanging your time and money for a degree. Both parties, you and the
school, are better off because of the exchange.

If you choose to trade hay for goats, you are voluntarily exchanging your goats for hay.
Both parties, you and the purchaser of the goats, are better off because of the exchange.

Mutually voluntary exchange is the best example of a win-win situation.

Whenever a bilateral exchange occurs, both parties must profit, for if not, one party
would simply have refused to trade. This basic result is sometimes used to argue that a
free market economy, consisting of billions or trillions of bilateral voluntary exchanges,
must therefore be to the benefit of everyone.

a win-win situation

The economy is the product of the voluntary exchange of goods and

services.

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RULE OF THE THUMB:

Voluntary exchange only happens if both sides are agreeable. Unless

both sides want the exchange, it does not happen.

Voluntary exchange vs. involuntary exchange

What are some typical examples of voluntary and involuntary exchange?
Write your answer in the box below.
 Share your notes with a partner.

Voluntary exchange Involuntary exchange

• A language is the product of the voluntary exchange of _____________

and _____________.

• A musical style is the product of the voluntary exchange of

_____________ , _____________ and _____________ .

• A scientific discipline is the product of the voluntary exchange of

_____________ and _____________ .

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 EXCHANGES OF SERVICES

Describing the sequence of events

An electrical machinery manufacturer is employing services of an engineering consultant

to design a motor. Below are the steps involved in the design process.

Put these steps in the order they occur.

 Select the best options

 Write the specifications

 Draw up detailed design

 Identify the design objectives

 Discuss the different options

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  Check the sequence of steps in the conversation below.

A: The new motor’s got to be reliable. And it’s got to be efficient --

low running costs are essential. Do you think you can do it?
B: Yes, the key thing is to keep the temperature low.
A: That’s right. Your main problem will be the cooling system. It must
be cooled by water.
B: On the other hand, the working environment is very clean. We
don’t have to worry about dust and dirt.
A: You have to solve the vibration problem, too.
B: Yes, it mustn’t vibrate above the limits, but that needn’t be a major
problem.
A: Good. So what’s the next step?
B: Well, we’ve identified the design objectives now. Once
you’ve written the specifications, I’ll do some sketches.
A: Should we meet again at that stage?
B: Yes, we ought to. Then I can show the different options.
A: Will you have price estimates by then?
B: Yes, I’ll be able to give you a pretty accurate breakdown of costs. We’ll
discuss all different options. Then you need to select the best
ones.
A: OK.
B: After that. I’ll draw up detailed designs.
A: How quickly can you get the sketches ready? Can you do them in a
week?
B: I’m afraid I can’t.
A: Can’t you get someone to help you?
B: Yes, I can, but it won’t save much time. I’ll need at least two weeks,
I’m afraid.

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Meeting requirements

Who are your company’s main customers or clients?

What are their needs?

How much do you think your products/services meet their needs?

What products do you What services do you

sell? provide?

• advanced • efficient
• high-quality • fast
• reliable • professional

Imagine you are working for a five-star hotel / a deluxe health resort / an
international language centre
 Draw a diagram

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

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 Terms of Business:
Make a sentence explaining ...
 Special offer. Save $$$s.

 Prices include carriage and VAT.

 All fees payable in advance.

Customers are
respectfully
 Rent or buy. requested to pay
 No credit card payments. within 14 days.

 Money back guarantee.

 Free delivery on orders over $100.

You shouldn’t pay
 Payment within 30 days.
later than 14 days
 Available for immediate delivery .

 30 days’ free trial.

 Don’t delay. Limited offer. $500 off if purchased before 30 June.

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 Think of ten questions a customer or supplier could ask you about the
product or service your company provides. Questions could be about:

 prices and payment

 delivery

 technical specifications

 quality standards

 how systems work

 procedures and processes

 Write the questions down

 Give your questions to a partner. They will ask them and you should answer.

Decide how important these are for your customers. Are they essential
(E) / important (I), or unimportant (U)?

 Lower prices than anyone else

 Competitive prices
 Flexible payments
 Professional staff
 Specialized know-how
 Fast service
 Reliable delivery dates
 Ability to meet quality standards
 A good after-sales service
 A wide range of products/services

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