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Exchange and Demand

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Exchange and Demand
Individuals engage in four fundamental activities which reduce the burden of scarcity: exchange, production, specialization, and entrepreneurial activity. Markets and prices facilitate these activities and these activities form the basis of market activity which we study using supply and demand analysis. We will examine voluntary exchange along with a detailed development of the demand curve. We will also, see exactly how pure exchange reduces the burden of scarcity.

I. Introduction
We will see that the demand curve is the result of individuals making choices constrained by scarcity. Individuals are assumed to be rational, that is, to make choices which maximize their utility, where utility is defined as the want-satisfying ability of the goods consumed. A rational individual chooses from among the possible combinations of goods, that particular combination which maximizes her utility—that which makes her as well-off as possible. The possible combinations from which the individual can choose are limited because of scarcity. In a market economy the individual confronts scarcity in the form of prices, the fact that time is scarce and in the form of limited quantities of goods he or she owns which can be sold to buy other goods. Prices here are the prices of the goods the individual buys and sells, and they include not just prices of consumption goods but also wages, interest, rents, and profits. For most of us the primary good we sell is our labor services, and since our time and abilities are constrained by scarcity the income we can hope to derive from the sale of our labor services is constrained by scarcity as well. Our other possible income sources including, interest, dividends or proprietor’s income form business profits, for example, are constrained as well. Furthermore, scarcity forces us to pay positive prices for the economic goods that...

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