Market Economy

2. Market Economy • Market: any arrangement that allows buyers and sellers to exchange things • None of us produce all we need to satisfy our needs and wants

3. What are the characteristics of a free market economy? Needed because no one is self-sufficient Voluntary exchanges take place in markets Free Market Economy

4. 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

5. Efficiency • Because resources are always scarce, societies try to maximize what they can produce using the resources they have • If a society can accurately assess what its people need and want, it increases its economic efficiency

6. 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

7. 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

8. 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

9. 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

10. Self-interest and competition work together to regulate the marketplace Self-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 (Laissez Faire) The Invisible Hand

11. What are the characteristics of a free market economy? Needed because no one is self-sufficient Voluntary exchanges take place in markets Free Market Economy Advantages: Efficiency, Freedom, Growth, Variety of Goods and Services Participants: Households and Firms Regulated by Self-interest Competition

12. Traditional Economy • Economic System that relies on habit, custom, or ritual to decide the three key economic questions • Usually found in communities that are relatively small and close • Economically successful if they meet their own needs • Tend to be slow to adopt new ideas/technology • Lack modern conveniences/low standard of living

13. Command EconomyCommunism • Centrally Planned Economy: an economic system in which the government, rather than individuals, makes all decisions on the three key economic questions (What is produced? How much is produced? Who is going to buy it?) • Gov’t owns both land and capital, and labor too, because it controls where people work and what they are paid

14. I Command You!!! • Command economy: another name for a centrally planned economy • Opposes: • Private property • Free market pricing • Competition • Consumer choice

15. Spread the wealth • Socialism: an economic and political system based on the belief that wealth should be distributed evenly throughout a society • Economic equality can only exist if economic power is controlled by the government, rather than by individuals or corporations

16. All or nothing… • Communism: a political system in which the central government owns and controls all resources and means of production, and makes all economic decisions • Conflict between labor and capital: labor is the source of all value • Anti-capitalism – all the profit created by the labor of the workers ended up in the hands of the owners = exploitation of workers and unequal distribution of wealth

17. What are the characteristics of a centrally planned economy? Features Disadvantages • Government owns all factors of production • Government makes all the decisions • Bureaucrats make detailed plans • No consumer sovereignty • Results in poor quality goods, shortages, and falling production • Does not achieve equality • Efficiency suffers • Allows no freedom of choice