Many years ago I had a heated discussion with a person who lamented the high profits made by some businesses. The implicit assumption made by my opponent was that the seller's profit was at the expense of the buyer, and that it should be curtailed, perhaps even by legislation.
That got me thinking, and I countered with this proposition: That the buyer made a profit as well, and that instead of the seller gouging the buyer, the buyer might even be making so much profit that they were gouging the seller instead.
That conversation eventually became an academic paper and a fairly straightforward formulation of the dynamics of single transactions. It was easily proved that the buyer profits. The buyer has an opportunity cost, which establishes the value of the transaction to the buyer. The three numbers cost, value, and price are different and the differences between them establish the social surplus, seller profit, and customer profit for the transaction. The existence of the profits for both parties makes intuitive sense; if either party were no better off after the transaction, then they would have no incentive to engage in it.
If you draw a picture of the transaction, it looks something like the diagram at left. The seller profit is price minus cost, the buyer profit is value minus price.
For those readers who have been exposed to supply and demand curves in microeconomics, this single transaction diagram will match up fairly well to what you might see if you take a vertical slice from a supply/demand diagram. The customer profit is part of the consumer surplus. The advantage to putting this on a single transaction diagram is that you can see the real profits in the transaction, whereas the supply/demand curve aggregates many buyers and sellers together in one vast undifferentiated mass.
Nanoeconomics diagrams become very useful when analyzing monopoly, monopsony (single buyer), and monopoly/monopsony situations.
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