Econ Ch 2.2 The Free Market

Markets A market is an arrangement that allows buyers and sellers to _________ things exchange

Circular Flow For each example below, predict whether the event should cause the economy to increase or decrease production and consumption of goods and services 1. Workers increase their education and training and become more productive. An increase in production will cause the economy to grow and the circular flow model will move faster. If people have better or more productive skills, they can produce ______ goods and services with all of the other resources. If they can produce _______with the same __________, production costs will ___________, businesses will be more willing to increase production, and consumers will _________ more. If more goods are produced and consumed, the economy________. more resources more decrease purchase grows

2. Many new technologies and inventions reduce the costs of production An increase in production will cause the economy to grow and the circular flow model will move faster. easier cheaper New technologies make it _______ and _________ to produce goods and services. ________ costs will be an incentive for businesses to produce more goods and services. If more goods and services are available, prices may _________ and consumers will purchase more. Lower decrease

3. Producers discover new sources of energy and other natural resources. An increase in production will cause the economy to grow and the circular flow model will move faster. resource Lower ________ costs mean that businesses can make more profit. More profit is an _________ for them to produce more goods and services. If more goods and services are available, prices may _________ and consumers will purchase more. incentive decrease

4. New laws encourage people to invest in new businesses An increase in production will cause the economy to grow and the circular flow model will move faster. Business owners will ______ in new capital goods if they anticipate that they will make more _______. If they anticipate profits, they will ______ more workers and purchase other resources. This creates more ________, people _______ more goods and services, and the economy_______. invest profits hire demand income grows

5. People have more income and feel good about the future of the economy. An increase in production will cause the economy to grow and the circular flow model will move faster. optimistic When people are more ________ about the economy and their future income, they feel "wealthier." Feeling this way, they will be more _______ to spend their income on goods and services. If people ______ more goods and services and are willing to pay for them, businesses will ________ more and the economy will grow. willing want produce

6. Many workers strike and refuse to produce goods and services. A decrease in production will cause the economy to produce less and the circular flow will move more slowly. less If people earn _____ income, they can not ________ as many goods and services. If the demand for goods and services_________, the economy will slow down and the circular flow will move more______. demand decreases slowly

7. Environmental regulations make it more difficult to use land resources. A decrease in production will cause the economy to produce less and the circular flow will move more slowly. difficult Regulations make it more ________ for businesses to produce goods and services. This usually ________ the ______ of production and fewer goods and services are produced. If _______ goods and services are produced, less ________ is earned and fewer goods and service are demanded. The economy _______ down. increases cost fewer income slows

8. Interest rates are so high that companies do not invest in new capital A decrease in production will cause the economy to produce less and the circular flow will move more slowly. expensive High interest rates make it more _________ to build new factories and buy more machinery. If these costs increase, businesses will _____ expand or they may close down. If this happens, the economy will not grow and the circular flow will slow down. not

9. There is political instability in some regions of the world and business owners people fear that conflicts that will stop trade. A decrease in production will cause the economy to produce less and the circular flow will move more slowly. When businesses feel that there is more ______ when trading with other countries, they will not invest in that production. If they do not produce as much for_______, they will not hire as many workers and they will not _____ other resources. This will ______ down the economy and the circular flow. risk export buy slow

10. Many people fear that they might lose their jobs. A decrease in production will cause the economy to produce less and the circular flow will move more slowly. If someone feels that they might not have as much income in the future, they will probably _____ buying some goods, such as new cars, appliances and houses. They will purchase _______ services that they might consider to be "luxuries." If this happens, the _________ and the circular flow will slow down. stop fewer economy

The Self-Regulating Nature of the market place According to Adam Smith, competition and our own __________ that keep the marketplace functioning. self-interest

ADAM SMITH A philosopher who in 1776 published, ____________________explains that the economy is made up of countless individual ___________ where each person (buyer and seller) _____ consider their own _______gain; self-interest. The Wealth of Nations transactions only personal

Competition Consumers in pursuit of their self-interest, have the ________ to look for ______ prices. An incentive is the _____ of a reward or the _____ of punishment that encourages a person to behave a certain way. Adam Smith observed that people respond to both positive and negative incentives. incentive lower hope fear

Economists call the _______ among producers for the dollars of consumers competition. While self-interest is the motivating force behind the free market, _________ is the regulating force. struggle competition

Invisible Hand Term coined by Adam Smith that economists use to describe the self-regulating nature of the marketplace. Ex. The overall result in an economy is that consumers get the _________ they want at prices that closely reflect the cost of _________ them – all of which occurs without any central plan or direction. products producing

Advantages of the Free Market Economic efficiency Economic freedom Economic growth Additional goals…including consumer sovereignty The power of consumers to decide what gets produced.