Voluntary Exchange: Definition, Principle, Model & Examples

Voluntary Exchange: Definition, Principle, Model & Examples
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  • 0:01 What Is Voluntary Exchange?
  • 0:47 Principle of Voluntary…
  • 2:45 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Francis

Jennifer has a Masters Degree in Business Administration and pursuing a Doctoral degree. She has 14 years of experience as a classroom teacher, and several years in both retail and manufacturing.

This lesson discusses the voluntary exchanges which occur in our lives almost every day. It discusses the importance of voluntary exchanges to the economy by presenting key definitions, the model, and relevant examples.

What Is Voluntary Exchange?

If you have been to a mall, grocery store, or coffee shop, then you have been involved in voluntary exchanges. A voluntary exchange is the process where customers and merchants freely and without coercion engage in market transactions or exchanges. This is typically accomplished with the exchange of money for a good or service. As a result of this exchange, both the buyer and the seller are better off than they were before.

Voluntary exchange is one of the main assumptions of neoclassical or mainstream economics. Following from that assumption are the beliefs that all market activities that are made possible by voluntary exchanges are efficient, that free trade always has positive effects, and that markets engaged in voluntary exchange are better off than markets that don't.

The Principle of Voluntary Exchange

A market economy is one in which the pricing of goods and services are determined by the suppliers (or producers) and the customers who demand them. In market economies, there are no government sanctions regarding how assets, labor, and raw materials are allocated by private organizations. The government does not control how goods and services are distributed; this is done through voluntary agreements between individuals and businesses to buy and sell.

Imagine that your friend Sandy owns a boutique that sells watches. She carries the watch you have been looking for, but at a price 50% higher than her competitors. You feel like you have to patronize your friend because she's your friend, but you're on a budget. What can you do?

The principle or model of voluntary exchange assumes that people will act based on self-interests. This is an important component of a healthy economy. If individuals in a market economy do not feel that they will benefit from the exchange, they would not be willing to make it. You would, therefore, likely purchase the watch from Sandy's competitor and hope she doesn't find out!

Let's look at another example.

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