1.5 Transaction Costs

Gay Lynn HillEconomics(ML), Mini Lessons

Common Sense Economics: What Everyone Needs to Know about Wealth and Prosperity

People who help others arrange trades and make better choices reduce transaction costs and promote economic progress. Such specialists, sometimes called middlemen, include campus bookstores, real estate agents, stockbrokers, automobile dealers, and a wide variety of merchants. Many believe that middlemen merely increase the price of goods and services without providing benefits. If this were true, people would not use their services. Transaction costs are an obstacle to trade, and middlemen reduce these costs. This is why people value their services.

The grocer, for example, is a middleman. (Of course, today’s giant supermarket reflects the actions of many people, but together their services are those of a middleman.) Think of the time and effort that would be involved in preparing even a single meal if shoppers had to deal directly with farmers when purchasing vegetables, citrus growers when buying fruit, dairy operators if they wanted milk or cheese, and ranchers or fishermen if they wanted to serve beef or fish. Grocers make these contacts for consumers, place the items in a convenient selling location, and maintain reliable inventories. The services of grocers and other middlemen reduce transaction costs significantly, making it easier for potential buyers and sellers to realize gains from trade. These services increase the volume of trade and promote economic progress.

In recent years, technology has reduced the transaction costs of numerous exchanges. With just a few swipes on a touch screen, buyers can now acquire information about potential sellers of almost every product. Apps are routinely used to shop for movies, clothing, and household goods, locate a hotel room, obtain tickets for a major concert or big football game, and even hail a taxi. These reductions in transaction costs have increased the volume of trade and enhanced our living standards.



Questions:

In the Video, a worker brings out food to customers. His skating adds transaction costs to the meal, but adds value in other ways:

  1. What if, as part of the transaction, Sonic required you to skate to the counter and dance back yourself. Would you be able to do it? Would having an expert skate for you reduce your cost in dropped food and embarrassment?
  2. Visiting this Sonic is part entertainment and part nutrition (of sorts). In what way does having a skilled skater deliver your food reduce your transaction costs (over, say, someone simply walking out)?
  3. Reflecting on the motivations of the skater at the beginning of the clip, in what ways does being able to skate at work reduce his transaction costs of employment?

This reading is an excerpt from Certell’s Common Sense Economics eBook.  Certell offers curriculum materials and eBooks free of charge for students and teachers.  Click here to download the Common Sense Economics Materials.


Image Citation:

26, Jan. 2018, Problem App Converter [Digital Image].  Retrieved from <google.com>