1. Chapter 3 Notes The U.S. Free Enterprise System

2. What do a farmer’s market, a sporting goods
store, the New York Stock Exchange, and a
community bulletin board where you posted a
sign advertising baby-sitting services have in
common?

3. The Free Market

4. Market: any arrangement that allows buyers and sellers to exchange things
None of us produce all we need to satisfy our needs and wants

5. What are the characteristics of a free market economy?
Needed because
no one is
self-sufficient
Voluntary exchanges
take place in
markets
Free Market
Economy

6. I’m special… so special…
Each of us specializes in a few products or services
Specialization: the concentration of the productive efforts of individuals/businesses on a limited number of activities
Baker – breads, cakes, cookies
Nurse – taking care of the sick
Leads to efficient use of land, labor, & capital
one task instead of all  work is done more efficiently, saving resources/avoiding waste

7. Free Market Economy: economic system in which decisions on the 3 key economic questions are based on voluntary (freedom of choice) exchange in markets
Individuals/businesses make their own decisions about what to buy/sell
Individuals/privately owned businesses own the factors of production, make what they want, & buy what they want
Answers the 3 key economic questions

8. Households: a person or group of people living in a single residence
Own the factors of production
Hired by firms as workers
Purchase products from firms
Product market: the arena of exchange in which households purchase goods and services from firms

9. Firm: an organization that uses resources to produce a product or service, which it then sells
Transform factors of production into goods or services
Purchase or rent land from households
Borrow money from household to purchase capital, paying households interest or profits in return
Factor Market: the arena of exchange in which firms purchase the factors of production from households

11. What are the characteristics of a free market economy?
Voluntary exchanges
take place in
markets
Needed because
no one is
self-sufficient
Free Market
Economy
Participants:
Households and
Firms

12. Self-Interest
The Wealth of Nations by Adam Smith – described how markets function
Buyer and seller consider only their self-interest (their own personal gain)
Self-interest is the motivating force in the free market – the push that leads people to act

13. Competition
Competition: the struggle among producers for the dollars of consumers
Incentive: the hope of reward or fear of penalty that encourages a person to behave in a certain way

14. The Invisible Hand
Self-interest and competition work together to regulate the marketplace
Self-interest allows consumers to purchase certain goods/services, and firms to produce them +
Competition causes firms to produce more, and moderates the desire to raise price ================================
Consumers get the products they want at prices that reflect the cost of producing them
The Invisible Hand: a term by Adam Smith to describe the self-regulating nature of the marketplace

15. What are the characteristics of a free market economy?
Needed because
no one is
self-sufficient
Voluntary exchanges
take place in
markets
Free Market
Economy
Advantages:
Efficiency, Freedom,
Growth, Variety of
Goods and Services
Participants:
Households and
Firms
Regulated by
Self-interest
Competition