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Chapter 2.2: The Free Market

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1 Chapter 2.2: The Free Market
Markets exist so that people can exchange what they have for what they want. A free market is a self-regulating economic system directed by individuals acting in their own self-interest.

2 Markets and Why They Exist
Market: an arrangement that allows buyers and sellers to exchange things (examples: farmer’s market, stores, the NY Stock Exchange, a babysitting flier) They exist because no one is self-sufficient; none of us produces all we require to satisfy our needs and wants They allow us to exchange the things we have for the things we want

3 Specialization Each of us produces just one or a few products; specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities. This leads to efficient use of resources. This leads to buying and selling; we need markets to sell what we have and buy what we want. If everyone was self-sufficient there would be no need for a market of any kind.

4 Free Market Economy Economic systems that are based on voluntary exchanges in markets Individuals and businesses use markets to exchange money and products The main players in the free market economy are households (people who live in the same residence) and firms (organizations that use resources to produce a product which it then sells) Firms transform “inputs”/factors of production into “outputs”/products

5 Continued Factor Market: the arena of exchange where firms purchase factors of production from households to try to make a profit (financial gain made in a transaction) Product Market: the market in which households purchase the goods and services firms produce

6 Adam Smith Scottish social philosopher who published The Wealth of Nations in 1776 where he described how the market functions He said that the buyer and seller only consider their own self-interest, or personal gain, which is the motivating force behind a free market

7 Competition Incentive: the hope of reward or the fear of punishment that encourages a person to behave in a certain way Adam Smith observed that people and consumers respond predictably to both positive and negative incentives Competition: the struggle among producers for the dollars of consumers

8 “The Invisible Hand” Term economists use to describe the self-regulating nature of the market place Our market place mostly runs itself without any central plan or direction; self-interest causes us to buy certain things and firms continue to produce them, while competition causes more production while preventing firms from increasing prices

9 Advantages of the Free Market
The free market meets the following economic goals we learned about in 2.1: Economic Efficiency: the free market is self regulating and responds efficiently to changes Economic Freedom: free markets have the highest degree of freedom of any system, from workers to firms to individuals Economic Growth: Competition encourages innovation, which encourages growth Additional Goals: Offers a wider variety of goods and services than any other system. Consumers having the power to decide what gets produced is consumer sovereignty

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