1. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 1 The Free Market System What is a Free Market? 1-1 Principles and Goals of Free Markets 1-2 Types of Economic Systems 1-3

2. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 2 L earning O bjectives 1-1 What is a Free Market? Explain the importance of free markets to consumers and businesses. LO1-1 Identify land, labor, and capital as scarce resources.LO1-2 Explain the differences between macroeconomics and microeconomics. LO1-3

3. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 3 Vocabulary 1-1 What is a Free Market? Importance of Free Markets market free market scarcity Scarce Resources and Production resources land labor entrepreneur capital Economies: The Study of Scarcity and Choice economics macroeconomics microeconomics

4. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 4 Importance of Free Markets A market is any place or method used by buyers and sellers to exchange goods and services. A microeconomic analysis would be to study the market for ostrich eggs. Macroeconomics would not consider only the ostrich egg market. It would look only at the total of all goods and services exchanged in an economy. 1-1 What is a Free Market?

5. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 5 Importance of Free Markets A free market is the freedom of consumers and businesses to buy and sell products with a minimum of government restrictions. Consumers are free to buy or not buy. When people pursue their own interests, businesses produces a seemingly limitless creation of goods and services. Both consumers and businesses benefit from exchange. 1-1 What is a Free Market?

6. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 6 Importance of Free Markets Scarcity is the condition in which human wants are forever greater than the available supply of time, goods, and resources. There are always limits on the economy’s ability to satisfy unlimited wants. Scarcity is a fact of life throughout the world. Individuals and countries never have all the goods and services that they wish. 1-1 What is a Free Market?

7. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 7 Vocabulary CHECKPOINT Importance of Free Markets 1-1 What is a Free Market? market free market scarcity Why is scarcity an issue for everyone, including the wealthy? Even a rich person who has everything must deal with a scarcity of time.

8. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 8 Scarce Resources and Production Resources are the basic categories of inputs used to produce goods and services. Resources are also called factors of production. 1-1 What is a Free Market? Land is any natural resource provided by nature and used in the production. Labor is the mental and physical capacity of workers to produce goods and services

9. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 9 Scarce Resources and Production An entrepreneur is a business leader who seeks to make profits by combining resources to produce new goods and services. 1-1 What is a Free Market? Capital means human-made goods that are used to produce other goods and services.

10. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 10 Vocabulary CHECKPOINT Scarce Resources and Production 1-1 What is a Free Market? resources land labor entrepreneur capital Why is money not considered capital in economics? Money itself does not produce anything. It is the combination of resources that produces goods and services. Money is only a means to purchase the resources used to actually produce goods and services.

11. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 11 Economics: The Study of Scarcity and Choice Economics is the study of how society chooses to use its scarce resources for the production of goods and services to satisfy unlimited wants. This cause-and-effect chain shows that unlimited wants cause the effect of scarcity. Society makes two kinds of choices: ► macro choices ► micro choices 1-1 What is a Free Market?

12. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 12 Economics: The Study of Scarcity and Choice Macroeconomics is the branch of economics that studies decision making for the economy as a whole, rather than individual parts. It examines nationwide measures, such as unemployment and growth of the economy. Macroeconomic decision making considers “big picture” policies. 1-1 What is a Free Market?

13. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 13 Economics: The Study of Scarcity and Choice Microeconomics is the branch of economics that studies decision making by individuals, families, or businesses. Examining individual trees, leaves, and pieces of bark, rather than looking at the forest, illustrates microeconomics. 1-1 What is a Free Market?

14. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 14 Vocabulary CHECKPOINT Economics: The Study of Scarcity and Choice 1-1 What is a Free Market? economics macroeconomics microeconomics market What is the difference between macroeconomics and microeconomics? Microeconomics looks at the small pictures of an economy. For example, the bison market. Macroeconomics looks at the big picture of an economy. For example, the unemployment in a nation.

15. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 15 L earning O bjectives 1-2 Principles and Goals of Free Markets Identify the main principles of a free market system. LO 2-1 Describe the goals of the free market system. LO 2-2 Explain the three economic questions that all economies must answer. LO 2-3

16. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 16 Vocabulary 1-2 Principles and Goals of a Free Market Principles of Free Markets private property rights consumer sovereignty voluntary exchange self-interest Economic Goals and Free Markets standard of living Three Fundamental Economic Questions What question How question For whom question

17. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 17 Principles of Free Markets Private property rights is are the rights of individuals and groups to own businesses and resources. may be land or factories that an individual, family, or business owns includes money, ideas for inventions, and intellectual property allows individuals to own the means to borrow money, take risks, invest money, and create personal wealth 1-2 Principles and Goals of Free Markets

18. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 18 Principles of Free Markets Consumer sovereignty is the freedom of consumers to cast their dollar votes to buy, or not to buy, at prices set in competitive markets. The consumer is the supreme authority. Consumers signal what products businesses should offer for sale. 1-2 Principles and Goals of Free Markets

19. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 19 Principles of Free Markets Voluntary exchange allows buyers and sellers decide what to buy and sell with a minimum of government intervention. Free markets allow everyone to compete in the marketplace. 1-2 Principles and Goals of Free Markets Self-interest is the focus of buyers and sellers on their own personal benefit.

20. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 20 Vocabulary CHECKPOINT Principles of Free Markets 1-2 Principles and Goals of Free Markets private property rights consumer sovereignty voluntary exchange self-interest How does a hair salon relate to the principle of free markets? A hair salon is an example private property driven by the profit motive. Other hair salons compete, but the consumer is free to choose a salon.

21. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 21 Economic Goals and Free Markets Standard of living is the level of economic well- being of people. The economy produces a greater volume of goods and services, which causes the standard of living to rise. Economic growth is necessary to provide more jobs and income for people. 1-2 Principles and Goals of Free Markets

22. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 22 Vocabulary CHECKPOINT Economic Goals and Free Markets 1-2 Principles and Goals of Free Markets standard of living Why is the economic goal of security important when the economy experiences a downturn? During a downturn in the economy, people lose the security of their jobs. Without income they will live in poverty without assistance. This is the reason government provides welfare and unemployment compensation.

23. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 23 Three Fundamental Economic Questions The What question requires an economy to decide the mix and quantity of goods and services that it will produce. 1-2 Principles and Goals of Free Markets The How question decides about the combination of technology and resources to use for producing goods and services. The For Whom question decides which people receive the goods and services produced. It is concerned with how the economic pie is divided.

24. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 24 Vocabulary CHECKPOINT Three Fundamental Economic Questions 1-2 Principles and Goals of Free Markets What question How question For whom question Why must a society answer the three basic economic questions? The three questions are answered because of the problem of scarcity. The free market system uses markets to decide how to deal with not having enough resources to satisfy human wants.

25. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 25 L earning O bjectives 1-3 Types of Economic Systems Understand the basic characteristics of economic systems including traditional, free markets, socialism, and communism. LO 3-1 Describe how a mixed economy involves different types of systems. LO 3-2

26. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 26 Vocabulary 1-3 Types of Economic Systems The Importance of Economic Systems economic system traditional economy market economy invisible hand capitalism command economy socialism communism mixed economy naturalization The Mixed Economy

27. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 27 The Importance of Economic Systems An economic system is the methods used to answer the What, How, and For Whom questions. The decision-making process involves many aspects of a nation’s culture, such as its laws, form of government, ethics, religions, and customs. Economists have established a simple way to classify economic systems into three basic types: ► Traditional ► Market ► Command 1-3 Types of Economic Systems

28. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 28 The Importance of Economic Systems A traditional economy answers the What, How, and For Whom questions the way they have been answered for generations. People in this type of society learn that copying the previous generation allows them to feel accepted. People in such a society believe that what has been good for centuries is still good today. the Inuit of Canada, native people of Brazil’s rain forest, and the Amish of Pennsylvania 1-3 Types of Economic Systems

29. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 29 The Importance of Economic Systems A market economy does not use customs or central planners to answer the three basic economic questions. It answers the What, How, and For Whom questions based only on voluntary buying and selling in markets. 1-3 Types of Economic Systems An invisible hand is a phrase that means that the best interests of a society are served by markets guided by self-interest.

30. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 30 The Importance of Economic Systems Capitalism is an economic system based on private ownership of resources and markets. Capitalism is also called the free market system and best describes the economic system of the United States. 1-3 Types of Economic Systems In a command economy, the What, How, and For Whom questions are answered by a dictator or central authority.

31. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 31 The Importance of Economic Systems Socialism is an economic system based on government ownership of resources and centralized decision making. Under socialism, a government owns and controls major industries, such as steel, electricity, and agriculture. 1-3 Types of Economic Systems Communism is a classless economic system in which all resources are owned by the workers. There is no government and people share production according to their needs.

32. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 32 Vocabulary CHECKPOINT The Importance of Economic Systems 1-3 Types of Economic Systems economic systems traditional economy market economy invisible hand capitalism command economy socialism communism How are socialism and communism different? Socialism is based on government ownership of resources and centralized decision making. Communism is Karl Marx’s ideal stage of socialism. Without any government, people voluntarily share according to people’s needs.

33. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 33 The Mixed Economy A mixed economy is a system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems. 1-3 Types of Economic Systems Nationalization is the act of transforming a private enterprise into a government enterprise. Most were temporary.

34. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 1 34 Vocabulary CHECKPOINT The Mixed Economy 1-3 Types of Economic Systems mixed economy naturalization How do a traditional, a command, and a market economy view the impor- tance of self-interest? The traditional economy rejects self-interest and makes decisions based on the past. The command economy rejects self-interest and makes decisions using government central authority. A market economy makes decisions using markets based on self-interest.