Warm-up What does self-interest mean to you? How does it play a role in Economics?

Free Markets Econ. Ch. 2 Section 2 1. Why do markets exist? Goals: 1. Why do markets exist? 2. Revisit the Circular Flow Model of the Free Market. 3. Explain how the Free market self-regulates. 4. Identify advantages and disadvantages of Free Market.

Market- an arrangement that allows buyers and sellers to exchange goods and services. Why do we need markets? -People are rarely self-sufficient, markets let us trade the things we have for what we need/want. Specialization- when businesses or individuals focus on producing a limited # of goods or services increases efficiency and quality - i.e. bakers, car manufacturers, etc.

Free Market/Free Enterprise System where economic decisions are made by the producers and consumers with a minimum of gov’t influence. Seen in partnership with Capitalism- an economic system where the factors of production are generally owned by private corporations or individuals It is based on voluntary exchanges between individuals. It is all by choice.

Circular Flow Model of Free Market

Self-Regulation of the Market Why do firms and households co-operate? Self-Interest and Competition Self-Interest – thinking and acting for one’s own personal benefit. People enter into the exchange to satisfy wants/needs. Firms enter into the exchange to make money. Competition – struggle of producers over consumer $$$- they all want consumers to choose them over others.

Self-Regulation cont. Incentive – Hope of reward or fear of consequences that encourages people to act a certain way. Self-Interest, Competition and Incentives act as regulating forces to keep prices low, quality high, and motivate people to enter the market to satisfy their wants.

“Invisible Hand of the Marketplace” Economic term that describes the combined forces of self-interest, competition and incentives as self-regulators in the market.

Advantages of Free Market Economic Efficiency – producers only make what consumers want, when they want it, at prices they are willing to pay consumer sovereignty – power of consumers to decide what is produced Economic Freedom – High degree of freedom for individuals with no government interference Economic Growth & Innovation – Competition encourages innovation to gain advantages over rivals, Entrepreneurs have lots of incentives to create new business

Disadvantages to Free Markets Economic Equity – Free markets have low equity, the difference between the poor and the rich can be huge, distribution of G & S is usually based on ability to pay Economic Security and Predictability –Because the Free market acts without government interference, it provides little security to those in need. There is no incentive to provide for those who are unable to pay or contribute to the market There is no country in our modern world that has a purely Free market, they have been modified by government involvement.

Goal Check Why do markets exist? Explain the Circular Flow Model of the Free Market. Explain how the Free market self-regulates itself. Identify advantages and disadvantages of the Free Market.