From Scarcity to Economic Interaction Gains from Trade –Better allocations –Comparative Advantage Trade takes place both –in markets (buyers and sellers) –within organizations

Market Economy Key Characteristics –Freely Determined Prices –Property Rights and Incentives –Competitive markets –Freedom to Trade –Role for Government –Role for Nongovernment Organizations Contrast with Command Economy

Look at Particular Markets in a Market Economy bike market on campus N.Y. Stock Exchange auctions of art world oil market labor market

To explain these markets we need a model: –The supply and demand model

Demand A relationship between the price and quantity demanded Describes the behavior of consumers Downward sloping Shifts versus Movements Along –demand versus quantity demanded

Supply A relationship between the price and the quantity supplied Describes the behavior of firms Upward sloping Shifts versus movements along –supply versus quantity supplied