Free Market Economy

1. Free Market Economy Chapter 2 Section 2

2. Main Goal: Economic Freedom • Free to own property • Free to spend money you earn • Free to get a job

3. Voluntary Exchange • People voluntarily exchange ‘this’ for ‘that’ • Typically money becomes the medium of exchange because it makes it easier and more efficient to do so

4. Specialization Arises Naturally • Specialization: Concentration of productive efforts of individuals and businesses on a limited number of activities • Gives rise to “Markets” • Arrangement that allows buyers and sellers to exchange

5. Circular Flow Model • Household: person or group living in single residence • Two roles: • Consumer – buys G & S • Supplier – Supplies Factors of Production to the firm • Firm: Business that produces Goods & Services • Two Roles: • Supplier (Producer) – Supplies G & S • Consumer (Buyer) – Buys the Factors of Production to use for production

6. Product Market (G & S Market): • Exchange of Final G & S • Supply & Demand of OUTPUTS • Factor Market (Resource Market): • Exchange Factors of Production • Supply & Demand of INPUTS Monetary Flow: Flow of Money (payment for G & S & Payment for F of P – Factor Payments, WIRP) Physical Flow: Flow of items purchased/produced (G & S in Product Market & F of P for the Factor Market)

7. Circular Flow Model G & S $$$ Households Firms Factor Payments Factors of Production

9. Based on Capitalism Private ownership of property Freedom to engage in business activities Specialization Concentration of efforts on limited activities Profit-Motive drives business Desire to maximize financial gains Competition is vital Drives prices down and equalizes supply Characteristics

10. In-depth look at key concepts • Profit Motive • Invisible Hand • Competition • Price System

11. Profit Motive: Self-Interest • People want to maximize their Profit • Relies on Human Nature • Pride ??? • Greed??? • Creates inventive minds and a strong work ethic

12. Invisible Hand • No centralized regulatory center • Driven by competition and the Price System • Prices are controlled and supplies are kept high

13. Competition • Economic Rivalry among sellers, buyers, workers, and employers • Keeps sellers of goods and services from charging excessively high prices • Substitution also helps with price regulation • People will choose an alternative product if something is too expensive

15. This is the basic coordination and communication system in a market economy Operates on the principle that everything has a price Buyers communicate to sellers by their purchasing habits Employees and employers communicate through their job choices and wage levels The Price System

16. Incentive • The hope of reward or fear of penalty that encourages or discourages people’s behaviors • Sales, Discounts, Free with Purchase… et cetera

17. Advantages of Free Market • Economic Efficiency • Self-regulating • Responds quickly to changing conditions • Provides G & S that consumers want at prices they are willing to pay • Economic Freedom • Workers work where they want • Firms produce what they want • People consume what they want

18. Economic growth • Competition encourages innovation • Growth encouraged via profit motive • Additional Goals • Wider variety of G & S than other systems • Consumer Sovereignty: consumers have power to decide what is produced

19. Disadvantage of Free MarketMarket Failures • Contradictions in the system (conflict of goals such as Security & Freedom) • Fairness… (monopolies??? Rich-Poor gap???) • Allocation of Future Resources • Political Process