Do Now Activity In your own words describe

Do Now Activity �In your own words describe a traditional economy. JClarke

Objectives: �Explain why markets exist. �Analyze a circular flow model of a free market economy. �Identify & examine the advantages of a free market economy. JClarke

Market Simulation �Take two pieces of yellow paper. �On one piece of paper, write a good that you can make good enough to sell it. �On the other piece of paper, write a service that you can provide good enough to sell. JClarke

Section 2 The Free Market JClarke

I. Why Markets Exist? JClarke

A. Market �Any arrangement that allows buyers and sellers to exchange things they have for things they want. �Eliminates the need for any one person to be self-sufficient JClarke

B. Specialization �Each of us specializes in a few products or services. �Concentration of the productive efforts of individuals & businesses on a limited number of activities. �Markets wouldn’t be necessary without specialization. �CQ: What are some examples? JClarke

C. Buying and Selling �People earn income by specializing in particular jobs & selling goods. �The money earned is then used to buy the products that they want to consume. �CQ: What are some examples of this? JClarke

II. Free Market Economy �Individuals and businesses make their own decisions about what to buy or sell. �Market economies are also known as capitalist economies. �Individuals and businesses privately own the factors of production. �Make what they want and buy what they want. �**Individuals answer the three economic questions. ** JClarke

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A. Households and Firms �The participants in a free market economy are households and firms. JClarke

1) Household �Person or group of people living in a single residence. �Own the factors of production �Consumers of goods and services JClarke

2) Firm �Business organization that uses resources to produce a product or service, which it sells. �Transform inputs (factors of production) into outputs (goods and services) JClarke

3) Circular Flow Model �Shows the exchange that takes place in a free market economy �Inner Ring �Shows the flow of resources and products �Outer Ring �Shows the flow of money JClarke

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B. Factor and Product Markets JClarke

1) Factor Market �When firms purchase factors of production from households �**Firms pay households for land, labor and capital** �Rent land �Hire workers �Borrow money JClarke

2) Product Market �When households buy the goods and services that firms produce. JClarke

3) Circular Flow �Households purchase the products made by firms with the money received from firms in the factor market. �The flow between the factor market and product market is circular. JClarke

III. The Self-Regulating Nature of the Marketplace �Competition and our own selfinterest keeps the market place functioning. JClarke

A. Self-Interest �An individual’s own personal gain �Motivating force in the free market �It’s the push that leads people to act. JClarke

1) Adam Smith �Published The Wealth of Nations (1776) �Described how markets function. �Defined the concept of self-interest. �“Give me that which I want, and you shall have this which you want…” JClarke

B. Competition �Struggle among producers for the dollars of consumers �Regulating force behind the free market JClarke

1) Incentive �The hope of reward or fear of penalty that encourages a person to behave in a certain way. �People respond to both positive and negative incentives. �CQ: What are some examples of positive and negative incentives? JClarke

C. The Invisible Hand �The self-regulation of the marketplace, driven by self-interest and competition is known as the “invisible hand. ” hand �Term coined by Adam Smith JClarke