Chapter 2 Section 2 The Free Market

What is a Market? Market- An arrangement that allows buyers and sellers to exchange things. Markets exist because there are no countries that produce all the needs and wants for its society. Specialization- Is the concentration of the productive efforts of individuals and firms on a limited number of activities. The focus on a few tasks very well, instead of having to learn them all. An example of specialization is on the board between the specialization of hunters and gatherers, let me explain…………………………………….

Buying and Selling- We need the market to sell what we produce, and buy what we need or want. Free Market Economy In a free market, individuals answer the three economic questions (???). Households and Firms- A household is a person or group of people who live in the same residents, they own the factors of production. They are also the consumers of goods and services. Firms- An organization that uses resources to produce a product, which it then sells.

The Self-Regulating Nature of the Marketplace Factor Market- The arena of exchange where firms purchase or rent land (natural resources). They take part in these transactions to gain a profit. Profit- is the financial gain made in a transaction. Product Market- Goods and services that firms produce are purchased by households in the Product Market. The Self-Regulating Nature of the Marketplace Self Interest- Ones own personal gain or benefit from a transaction. This observation was established by Adam Smith, a Scottish Philosopher who published The Wealth of Nations in 1776.

Competition- Is the struggle among producers for the dollars of consumers. When competition occurs, incentives are given to sell a good or service. Incentive- is the hope of reward or the fear of punishment that encourages a person to behave a certain way. Invisible Hand- Competition and lower prices is a phenomenon that takes place without any central plan or direction, Adam Smith calls this phenomenon “the invisible hand of the marketplace.”

Advantages of the Free Market Economic Efficiency….(p.32) Economic Freedom…...(p.32) Economic Growth…….(p.32) Additional Goals………(p.32) Consumer Sovereignty- The fact that consumers, in essence, decide what gets produced through the self-regulating nature of the Marketplace.