Overview

1. The Market Economy

2. Demand

Readings: Ch.3

The Market Economy

Main Characteristics of Market Economies:

1. Self Interest: Individuals pursue their own self-interest, buying and selling what seems
best for them & their families
2. Incentives: People respond to incentives (in terms of economics- money)
3. Market Prices & Quantities: Prices and quantities are determined in open markets in
which would be sellers compete to sell their products to would-be buyers
4. Institutions: All of these activities are governed by a set of institutions largely created
by government. These institutions include
a. Individualist Institutions of Property and Decision Making: Before people can
begin to think about making an exchange they must be clear about what belongs
to whom. For decentralized exchange to take place people must have individually
held private property which is the ownership of assets by nongovernmental
economic agents
b. Social Institution of Trust: Trust must exist between buyers and sellers. This trust
may be established through cultural norms, through direct one-to-one
relationships or through the establishment of contracts.
c. Infrastructure for the smooth flow of goods & services: refers to the physical
infrastructure of transportation and storage.
d. Money as a Medium of Exchange: to facilitate the flow of goods and services, we
need a generally accepted means of payment.

The natures of private property and contractual obligations are defined by legislature and
enforced by the courts.

*Note that private property is an institution

-blue lines are physical flows
-green lines are financial flows
 Supply and Demand

Demand: The demand function shows the quantity demanded of a good for different levels of
the good’s price given the variables of other relevant variables
Quantity demanded: amount consumers are willing to buy during a given time period

Law of Demand: As a product’s price increases the quantity demanded decreases; as a

product’s price decreases, the quantity demanded increases. Ceteris paribus

****Changes in the commodity’s price correspond to movements along the demand curve, which
are referred to as changes in quantity demanded****

One and only one variable causes a change in quantity demanded: the price