The Free Market Market any arrangement that allows

The Free Market

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

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

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

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

• 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

• 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

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

Self-Interest • The Wealth of Nations by Adam Smith – described how markets function • Buyer and seller consider only their selfinterest (their own personal gain) – Self-interest is the motivating force in the free market – the push that leads people to act

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

The Invisible Hand • 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

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 Participants: Households and Firms Regulated by Self-interest Competition Advantages: Efficiency, Freedom, Growth, Variety of Goods and Services