Question

Explain in general terms why an exchange between a seller whose opportunity cost is less than a buyer's valuation of some good generates gains for both of them.

Answer 1

The answer lies in one of the concepts from 'Father of modern economics' which is voluntary exchange which implies that economy works well when between buyer and seller,there is a willingness to exchange,that is they have the right incentives to buy and sell respectively,now in given question,if seller 's opportunity cost is lower than a buyer 's valuation of some good that is let us say that seller has produced good x using his/her resources,now using the same resources seller could have produced good y which would have been valued by seller at price a,now for good x if buyer 's valuation is b which is greater than a,then it is a win for seller of good x,as s/he has invested his/her resources in right good since now s/he can receive price b from buyer which is greater than price of his/her alternative investment of resources to produce good y,that is seller will theoritacally gain (b-a) in terms of his/her valuation.Now we have seen the incentive for seller,for buyer the incentive here is value,buyer values good x here more than the price s/he is willing to pay for good x,that is good x for him/her is internally valued more than price b,so in other if c is his/her actual valuation of good x,his/her gain is (c-b),so the buyer also gains in his/her own valuation.

Thus the voluntary exchange in this case backed by willingness to buy and sell owing to their own valuations make this trade a win-win for both buyer and seller.