If you’ve taken any kind of economics course, you’ve probably heard the phrase mutually beneficial voluntary transactions. However, as I will continue to say, you don’t need an economics degree to understand its principles. Essentially, they are the foundation of a free market economy. As usual, I’ll let a simple example do most of the explanation. Over the years, I have found that, in general, this is the easiest way to understand the basic principles of economics.

Okay, let’s say I go to the grocery store and buy a gallon of milk for $ 4 (actually, I bought 2 gallons yesterday). Obviously, I don’t know the exact market price of the milk, so I rounded up to $ 4. When I go to the cash register, taxes aside, I give the cashier $ 4 and take my gallon of milk. Now, let’s see why the transaction actually took place. Simply put, I valued a gallon of milk more than my $ 4, while the cashier or the grocery store itself values ​​my $ 4 more than a gallon of milk. Each party can gain something from the transaction (profit), so it is considered mutually beneficial. A slightly less obvious but equally important idea here is that all of these types of transactions are voluntary, meaning that each party actively engages in them and is not forced. These concepts are the fundamental definition of a free market economy in which transactions are not forced. Obviously, one of the largest and most significant examples of a mutually beneficial voluntary transaction is international trade as it relates to imports and exports.

The main factor that determines the number of transactions that take place in any particular free market economy is price. Suppose that on any given day in any grocery store, the price of a gallon of milk is $ 5. At this price, 20 people are still willing to buy the milk. As the price increases, the quantity supplied increases, so the grocery store, wanting to increase its profit, produces 40 gallons of milk. Since the demand for milk at the price of $ 5 is only 20 people, however, only 20 transactions will take place. This situation is called surplus, because the quantity supplied is greater than the quantity demanded. Remember that these are mutually beneficial voluntary transactions. On the other hand, if the grocery store for some reason lowered the price to $ 3 per gallon, more people would be willing to buy milk at that price (we’ll say 40 people) but the grocery store would reduce the quantity supplied to 20, so that only 20 transactions would be made. This situation is known as shortage in the sense that the quantity supplied is less than the quantity demanded. Therefore, the maximum number of transactions occurs at a price of $ 3, called the equilibrium price.

Congratulations, you now have a better understanding of mutually beneficial voluntary transactions than most politicians and the US government.