CHAPTER 2 SECTION 2 Marketan arrangement that allows

CHAPTER 2 SECTION 2

• Market-an arrangement that allows buyers and sellers to exchange things. • Markets exist because no one is self-sufficient. • Markets allow us to exchange things we have for things that we want.

House Holds And Firms • The players in free market economy are house holds and firms. • Household is a person or group living in the same residence. • Households can own the factors of production , land, labor, and capital.

Factor Market • A Firm is an organization that uses resources to produce a product • Firms purchase factors of production from house holds. This exchange is known as factor market.

• Factor payments- The income people receive for supplying factors of production, such as land, labor, or capital. • Examples • Being paid for labor costs • Rent for a factory building

Product Market • Profit is a financial gain made in transaction. • Product market is the market in which goods are purchased by households.

• The market economy is distinguished by individual choice to determine answers to the 3 key economic questions. • Market economies are also called free markets. • Capitalism is a term often used to describe a free market. This means that decisions are made in the marketplace and not through central planning.

Adam Smith • Adam Smith was one of the first people to offer an explanation of how a market economy should work. • He was a Scottish Philosopher who was greatly respected by his students and fellow professors.

Smiths Theory • Smith identified land, labor, and capital as the factors of production that generate a nations wealth.

• Invisible hand- term economists use to describe the self-regulating nature of the marketplace. • Consumer Sovereignty- the power of consumers to decide what gets produced.

• Incentive- an expectation that encourages people to behave in a certain way. • Competition- the struggle among producers for the dollars of consumers

• Self-Interest- one’s own personal gain in the economy

• Advantages of a free market. • Economic efficiency- Producers make only what consumers want. • Economic Growth. Entrepreneurs are always seeking profitable opportunities.

• Economic Freedom- Producers have the choice to make what they want, and consumers to purchase what they want. • What is a Disadvantage of a Free Market Economy?

• The biggest disadvantage of a market economy is that there are big gaps between the rich and poor

• Specialization- the concentration of the productive efforts of individuals and firms on a limited number of activities. • A free market is a self-regulating economic system directed by individuals acting in their own self-interest.

Ch 2. Sec. 2 Questions

Question #1 • How does specialization make us efficient?

Question #2 • What is Profit?

Question #3 • What is the difference between the factor market and the product market?

Question #4 • What are the roles of households and firms in a market economy?

Question #5 • How does competition among firms benefit consumers?

Question # 6 • Explain what Adam Smith meant by “the invisible hand of market place”.

Question #7 • What is the connection between incentives and consumer sovereignty in a free market.

Question # 8 • Why is economic equality difficult to achieve in a free market economy?

Question # 9 • What is Product Market?

Question # 10 • Competition and what else helps to keep the market place functioning?