do now what do a farmer’s market, a sporting goods store, the new york stock exchange, and a...
TRANSCRIPT
Do Now
What do a farmer’s market, a sporting goods store, the New York Stock Exchange, and
a community bulletin board where you posted a sign advertising baby-sitting
services have in common?
The Free Market
• Market: any arrangement that allows buyers and sellers to exchange things– None of us produce all we need to satisfy our
needs and wants
What are the characteristics of a free market economy?
Free MarketEconomy
Voluntary exchangestake place in
markets
Needed becauseno one is
self-sufficient
I’m special… so special…
• Each of us specializes in a few products or services– Specialization: the concentration of the
productive efforts of individuals/businesses on a limited number of activities
– Baker – breads, cakes, cookies– Nurse – taking care of the sick
• Leads to efficient use of land, labor, & capital– one task instead of all work is done more
efficiently, saving resources/avoiding waste
It’s Free!!!• Free Market Economy: economic system
in which decisions on the 3 key economic questions are based on voluntary (freedom of choice) exchange in markets – Individuals/businesses make their own decisions
about what to buy/sell– Individuals/privately owned businesses own the
factors of production, make what they want, & buy what they want
• Answers the 3 key economic questions
• Households: a person or group of people living in a single residence– Own the factors of production– Hired by firms as workers– Purchase products from firms
• Product market: the arena of exchange in which households purchase goods and services from firms
• Firm: an organization that uses resources to produce a product or service, which it then sells– Transform factors of production into goods or
services
– Purchase or rent land from households
– Borrow money from household to purchase capital, paying households interest or profits in return
• Factor Market: the arena of exchange in which firms purchase the factors of production from households
What are the characteristics of a free market economy?
Voluntary exchangestake place in
markets
Free MarketEconomy
Needed becauseno one is
self-sufficient
Participants:Households and
Firms
Self-Interest• The Wealth of Nations by Adam Smith –
described how markets function
• Buyer and seller consider only their self-interest (their own personal gain)– Self-interest is the motivating force in the free
market – the push that leads people to act
Competition• Competition: the
struggle among producers for the dollars of consumers
• Incentive: the hope of reward or fear of penalty that encourages a person to behave in a certain way
The Invisible Hand• Self-interest and competition work together to
regulate the marketplaceSelf-interest allows consumers to purchase certain
goods/services, and firms to produce them+Competition causes firms to produce more, and moderates
the desire to raise price================================
Consumers get the products they want at prices that reflect the cost of producing them
• The Invisible Hand: a term by Adam Smith to describe the self-regulating nature of the marketplace
What are the characteristics of a free market economy?
Voluntary exchangestake place in
markets
Needed becauseno one is
self-sufficient
Participants:Households and
Firms
Free MarketEconomy
Regulated bySelf-interestCompetition
Advantages:Efficiency, Freedom,Growth, Variety of
Goods and Services