1. Chapter 2 Section 2
The Free Market

2. The Free Market
Economic freedom is the chief characteristic of a free market economy
A market is any arrangement that allows buyers and sellers to exchange things
Markets eliminate the need for any one person to be self-sufficient

3. Specialization
Instead of being self-sufficient, everyone specializes in a few products or services
Specialization is the concentration of the productive efforts of individuals and businesses on a limited number of activities
Leads to efficient use of resources

4. Buying and Selling
Without specialization, markets would not be necessary, therefore we need a system that allows us to sell what we have produced and buy what we want
In a modern market-based economy, people typically earn income by specializing in particular jobs and use that income to buy the products they want to consume

5. Free Market Economy
Market economies are also called capitalist economies because the capital that entrepreneurs invest in businesses is a vital part of the system
Individuals and privately owned businesses own the factors of production, make what they want, and buy what they want

6. Households and Firms
Households and Firms are the participants in a free market economy
Household – a person or group of people living in a single residence
Firm – an organization that uses resources to produce a product or service, which then it sells

7. Factor and Product Markets
Factor Market – when firms purchase factors of production from households
Product Market – households buy the goods and services that firms produce

8. Draw this circular flow model on pg. 148 in your notebook.

9. Self-Interest Adam Smith wrote The Wealth of Nations in 1776
He observed that an economy is made up of countless individual transactions in which the buyer and seller consider only their self- interest or personal gain
Self-interest is the motivating force in the free market

10. Competition
Consumers pursuing their own interests have the incentive to look for lower prices
An incentive is the hope of reward or fear of penalty that encourages a person to behave a certain way
Competition is the struggle among producers for the dollars of the consumers
Competition is the regulating force of the free market economy

11. The Invisible Hand
Self-interest and competition work together to regulate the marketplace without any central planning or direction
Adam Smith referred to this as the “Invisible Hand”

12. Advantages Economic Efficiency Economic Freedom Economic Growth
Because it is self-regulating, it responds efficiently to rapidly changing conditions
Economic Freedom
The highest degree of economic freedom
Economic Growth
Encourage growth because entrepreneurs are always seeking profitable opportunities
Additional Goals
Consumer sovereignty – consumers have the power to decide what gets produced because producers have the incentive to meet consumers’ desires