Free Market

Why Markets Exist Market-arrangement that allows buyers and sellers to exchange things Specialization- concentration of productive efforts by individuals and firms on limited activities. Teachers-Nike Are we self-sufficient? As a result we need markets. Buy-selling

Free Markets Voluntary exchange of goods- Free Market Individuals answer the 3 basic economic questions, (what how, and who) Use of markets to exchange $ and products Circular Flow Model Pg 30 Inner Ring- Resources and products Outer ring-Flow of money

Households/Firms Household-Group living in a residence together. Own factors of production/consumers Firm-organization that uses to produce and sell a product. Takes input (resources) and makes “ output ” goods or services. Relationship between?

Factor market Firms purchase/rent land. Hire and pay workers/labor. Purchase capital/stock/loans Why? Profits-financial gain in transaction Product Market- Goods and services produced by firms purchase by households/consumers Circular Flow Model of Market Economy

Self Regulation Cooperation between firms and households Transactions-Why Adam Smith-Scottish philosopher/economist Self interest — own personal gain Incentive- hope reward/fear of punishment Motivation for people

Free Market Can respond to motivations predictably Lower prices= increased purchasing Manufacturer= striped shirts vs polk dot shirts. If consumers buy striped shirts- where is the greatest profit to be made? Potential sales & profit Competition- struggle between producers

Incentives Monetary- Profit that rewards money Nonmonetary- rewards to consumer& business in forms of gifts, services, other ways Invisible Hand Concept Interaction between self interest and competition No interference by government- market flow only! Prices and sales regulated by consumer and producers by activites

Advantages of Free market Economic efficiency- producers are making what consumers want, when they want it, at prices they are willing to pay Economic freedom- workers work where they want, firms produce what they want, individuals consume what they want Growth- competition and incentives inspire entrepreneurs, and innovation and profit Additional Goals-consumer sovereignty-consumers ultimately have power.