Characteristics of a Free Market Economy

1. 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?

2. The Free Market

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

4. 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

5. 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

6. 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

7. 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

8. 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

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

11. 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

12. 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

13. 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 The Invisible Hand

14. 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