Voluntary Exchange: Definition and Examples

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. In one sense this is true, but upon a more careful investigation, it is also misleading. To clarify the distinction, this chapter will explain in some detail how competitive markets are likely to work. However, the competitive process we need to understand is not the “perfect competition” described in standard economic models. Rather, we need to understand dynamic competition as described by Joseph Schumpeter (1942) when he talked about creative destruction. For Schumpeter, the crucial economic dynamic was one in which new businesses rise up in a creative process while existing businesses are simultaneously destroyed. Friedrich Hayek described this same dynamic competition when he discussed competition as a discovery process and the free market as a “spontaneous economic order.”1

Voluntary Exchange Simplified

Why is voluntary exchange important?

Voluntary exchange is important because when participants feel they benefit from a transaction, theyre more likely to complete it organically. Having a voluntary exchange can lead to a more efficient and profitable production for businesses. It also has the potential to encourage specialization since certain consumers may want niche items. Without government restrictions, a voluntary exchange can create fair competition in the marketplace.

What is voluntary exchange?

Voluntary exchange is a type of transaction where two parties freely trade goods or services. This occurs in a market economy, which is a type of economy where both participants of an interaction gain a mutual benefit from it and are better off than when they started. For instance, if someone offers tutoring services to high school students, theyre benefiting by earning money in exchange for their expertise. Likewise, the high school student gains the knowledge they need to pass their exam.

In market economies, the exchange of goods and services is free of government restriction, meaning businesses or individuals determine the prices for their products or services. Voluntary exchange is a term created by neoclassical economists to describe their primary assumption of trading. This has led to what is today referred to as a free market.

What are some disadvantages of using voluntary exchange?

Using voluntary exchange for transactions may have some drawbacks. First, because there arent any restrictions, buyers have the choice to refuse services or products if theyre uninterested. This can lead to a loss of business for a company and has the potential for discrimination.

For instance, if you want to buy a purse at the mall but the store is selling them for double the price of the ones youve seen online, you may decide to shop for your purse elsewhere. This can cause the purse stand to lose your business. Another consequence of implementing voluntary exchanges is the potential for businesses to be unsuccessful if individuals feel they dont offer them any benefit.

What are the parts of voluntary exchange?

Voluntary exchanges comprise many variables in order to operate efficiently. The parts of voluntary exchange include the following:

Demander of goods

In order to have a voluntary exchange, the transaction comprises an individual or business that demands the good or service. These are the people interested in purchasing what a company sells. For instance, a coffee shop is interested in buying wholesale coffee beans to roast in their coffee shop. The individual demanding the goods is looking to improve their life by buying a product or service that may help them.

Supplier of goods

The supplier of goods is the company or individual selling the good or service. They may manufacture their goods or outsource them from another manufacturer. In our previous scenario, this would be the wholesaler selling the coffee beans in bulk. In a voluntary exchange, the supplier is looking to make money by selling their product.

Small businesses

Another part of the voluntary exchange is small businesses that may produce more products than they need for operations. When this occurs, they may choose to exchange their extra product for money. This gives other businesses the chance to decide voluntarily to purchase the item if it meets their needs. For instance, if a small coffee supplier produces too much coffee, they may offer their coffee to other businesses.

Government

The governments involvement in a voluntary exchange is very limited. They allow for the free flow of products and services. To help promote increased economic growth and activity, the government supports voluntary exchanges. This is contrary to economic systems, such as socialism and communism, which regulate the economy.

Examples of voluntary exchange

Here are some examples of voluntary exchange transactions:

Example 1

Lisa owns a 2002 truck she bought after getting her license. Now that Lisa got a promotion at work, she wants to sell her truck. Since Lisa lives in the United States, where there is a market economy, she can sell her truck freely. This means that others can freely buy her truck but can also choose not to purchase it if it doesnt meet their needs or if they feel its unattractive. This is a voluntary exchange since both Lisa and the prospective buyers can decide whether to complete a transaction with no interference from the government.

Example 2

Jeremiah owns a large strawberry patch in North Carolina. Every summer he sells his strawberries to the public at his farm and at the local farmers market on the weekends. Jeremiah voluntarily exchanges his time and agriculture expertise for money. Likewise, customers voluntarily exchange money to purchase his strawberries. If they notice some of his strawberries have defects, they can decide to go elsewhere for their strawberries. Because both parties receive desirable outcomes, this is a voluntary exchange.

Example 3

A shoe store in the U.S. pays its employees $15 an hour in exchange for them to answer questions and help customers find shoes. This benefits the employee since they earn a regular salary which they can use to pay their bills. It also benefits the shoe store since it ensures they help their customers and have satisfied buyers. Since the employee can choose to find a job elsewhere if theyre unsatisfied with the salary or type of work, this is a voluntary exchange. The shoe store can also choose whether to hire or fire their employees.

FAQ

What are examples of voluntary exchange?

Likewise, customers voluntarily exchange money to purchase his strawberries. If they notice some of his strawberries have defects, they can decide to go elsewhere for their strawberries. Because both parties receive desirable outcomes, this is a voluntary exchange.

What happens in a voluntary exchange?

A voluntary exchange is a transaction where two people trade goods or services freely, there is no coercive or restrictive force involved in the transaction. Both parties want to make the exchange of items, and both parties will benefit from the trade.

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