ECON 1200 1st Edition Lecture 7- In a market economy, firms decide how to produce goods (using low-cost methods to produce high-quality products) and markets decide who consumes it (those most willing and able to pay; markets reward hard work and the possession of valuable resources with higher income)o Higher income= higher ability to buy goods- Free-Market- A market with few government restrictions on how a good or service can be produced or sold (or on how a factor of production can be employed)o No modern economy has a free marketo Government intervention, restricting laws, etc.o Market economies that come closest to being free market have been more successful in the long run than centrally planned economies have been in providing their people with rising standards of living- The government has a limited but critical role in a market economy: In order for a market economy to succeed; the government must provide an independent court system to enforce contracts and property rights- Property Rights- The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it- When property rights and contracts are not well-enforced, few entrepreneurs take on the risk of producing goods and services, leaving the economy inside its PPFCHAPTER 3: WHERE PRICES COME FROM—THE INTERACTION OF SUPPLY AND DEMAND- The model of supply and demand explains how prices are determined in a market economy- Quantity Demanded- The amount of a good that a consumer is willing and able to purchase at a given price- Market Demand- The demand by all the consumers of a given good or service- Demand Schedule- A table that shows the relationship between the price of a good and the quantity of the product demanded- Demand Curve- A curve that shows the relationship between the price of a good and thequantity of the product demanded- Each point on a demand curve is a quantity demanded corresponding to a specific price; together, the points represent demand over a range of prices- Law of Demand- The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase and when the price of a product rises, the quantity demanded of the product will decrease- Ceteris Paribus- “All else equal” conclusion. The requirement that, when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constanto This assumption allows us to focus on the effects of one change at a time- The demand curve illustrates the relationship between quantity demanded (x-axis) and price (y-axis) holding other demand variables (not shown on an axis) constanto When a variable on an axis changes, move along the curveo When a variable not on an axis changes, the whole curve shifts- When price increases, quantity demanded decreases, and when price decreases, quantity demanded