I have at least two practicum posts planned for markets, looking at them from different angles.
One is a direct follow-up to this post: we say two “subsystems” (of the sort used in this post) are in “equilibrium” when they can’t make any “trade” which would yield a pareto gain on the objectives. In this post, we saw that that means the two subsystems have the same trade off ratios (aka opportunity costs). Those ratios are prices—specifically, the prices at which any of the equilibrated subsystems can “trade” with any other subsystems or the external world. The equilibrated subsystems are a “market”, and their shared prices are the defining feature of that market.
Under that angle, market size isn’t particularly relevant. Markets are about pareto optimality and trade-equilibrium.
The other angle is markets as a limit in games with many identical players. As the number of players grows, identical players compete to make deals, and only the best bids/offers win. So, we end up with a “shared price” for whatever deals are made.
Under that angle, market size is a central question.
Market size is central in other cases as well. It is what permits specialization of labor. Comparative advantage is a mechanism for permitting this development even when one of the producers has an absolute advantage, such as Yuma in this example. However, the most important factor in specialization is sheer market size. This is why I’m excited to consider this frame further in the future.
I have at least two practicum posts planned for markets, looking at them from different angles.
One is a direct follow-up to this post: we say two “subsystems” (of the sort used in this post) are in “equilibrium” when they can’t make any “trade” which would yield a pareto gain on the objectives. In this post, we saw that that means the two subsystems have the same trade off ratios (aka opportunity costs). Those ratios are prices—specifically, the prices at which any of the equilibrated subsystems can “trade” with any other subsystems or the external world. The equilibrated subsystems are a “market”, and their shared prices are the defining feature of that market.
Under that angle, market size isn’t particularly relevant. Markets are about pareto optimality and trade-equilibrium.
The other angle is markets as a limit in games with many identical players. As the number of players grows, identical players compete to make deals, and only the best bids/offers win. So, we end up with a “shared price” for whatever deals are made.
Under that angle, market size is a central question.
Market size is central in other cases as well. It is what permits specialization of labor. Comparative advantage is a mechanism for permitting this development even when one of the producers has an absolute advantage, such as Yuma in this example. However, the most important factor in specialization is sheer market size. This is why I’m excited to consider this frame further in the future.