Understanding the U.S. Free Market Economy

1. Chapter 3 NotesThe U.S. Free Enterprise System

2. 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?

3. The Free Market

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

5. 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

6. 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

7. 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

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. 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. Where final products are sold by firms to Households. Where households Sell the Factors of Production to firms

11. 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

12. 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

13. 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

14. Self-interest and competition work together to regulate the marketplace Self-interestallows 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

15. 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