1. Please pull out your notes from yesterday – the one that’s folded about “Economic Systems”Please pull out your notes from yesterday – the one that’s folded about “Economic Systems” Respond to the following in your DNA log:Respond to the following in your DNA log: Describe 2 basic differences between a Traditional Economy and a Market Economy …Describe 2 basic differences between a Traditional Economy and a Market Economy …

3. Market: an arrangement that allows buyers and sellers to exchange thingsMarket: an arrangement that allows buyers and sellers to exchange things Exist because no one is self-sufficientExist because no one is self-sufficient Allow us to exchange things we have for things we wantAllow us to exchange things we have for things we want

4. Specialization Each of us produces just one/a few products (not everything)Each of us produces just one/a few products (not everything) Specialization: concentration of productive efforts of individuals and firms on a limited number of activitiesSpecialization: concentration of productive efforts of individuals and firms on a limited number of activities Leads to efficient use of resourcesLeads to efficient use of resources Buyers & Sellers: Because we each specialize, we need markets to sell what we have to buy what we want

5. Based on voluntary exchanges btwn buyers & sellers in marketsBased on voluntary exchanges btwn buyers & sellers in markets Can represent Free Market with circular flow diagramCan represent Free Market with circular flow diagram –Shows how money, resources, & products flow through economy

6. Players: Household: person/group of people living in same residenceHousehold: person/group of people living in same residence –Own factors of production –Consumers of goods & services Firms: business or organization that uses resources to produce then sell a productFirms: business or organization that uses resources to produce then sell a product

7. HOUSEHOL DS FIRMS MARKET for GOODS & SERVICES MARKET for FACTORS OF PRODUCTION Spending $ Revenue Wages, Rent, Profit Income Goods & services bought Labor, land & capital Factors of production Goods & services sold

8. 6 basic characteristics I.Little or No Government Controls II.Freedom of Enterprise III.Freedom of Choice IV.Private Property V.Profit Incentive VI.Competition & Self-Interest

9. Gov’t has laissez faire policy (let them do) – non-intervention in economyGov’t has laissez faire policy (let them do) – non-intervention in economy Gov’ts role is to protect property rights, maintain order & civility, enforce contracts – That’s it!Gov’ts role is to protect property rights, maintain order & civility, enforce contracts – That’s it! No central gov’t planningNo central gov’t planning

10. Free Enterprise: Individuals & privately owned businesses own factors of productionFree Enterprise: Individuals & privately owned businesses own factors of production Businesses & entrepreneurs make what they wantBusinesses & entrepreneurs make what they want Consumers buy what they wantConsumers buy what they want Buyers & Consumers influence decisions about what is produced by dollar “votes”Buyers & Consumers influence decisions about what is produced by dollar “votes” –Why they buy more will be produced more

11. Have a right to own private propertyHave a right to own private property If you own a business, profit is your propertyIf you own a business, profit is your property Incentive = any factor that motivates a particular actionIncentive = any factor that motivates a particular action Firms’ goal = to make $$ (profits) by increasing salesFirms’ goal = to make $$ (profits) by increasing sales Consumers expected to respond to positive incentive of lower prices by buying moreConsumers expected to respond to positive incentive of lower prices by buying more

12. Competition: struggle among producers for dollars from consumer Leads to lower prices as consumers choose from among rival producersLeads to lower prices as consumers choose from among rival producers ADAM SMITH Buyers’ and sellers’ self-interest (desire for personal gain) motivate free marketBuyers’ and sellers’ self-interest (desire for personal gain) motivate free market Consumers have incentive to look for lower pricesConsumers have incentive to look for lower prices

13. ADAM SMITH Wrote Wealth of Nations 1776, described how pure free market worksWrote Wealth of Nations 1776, described how pure free market works Consumers want low cost, firms want high profit – balance found naturally – invisible handConsumers want low cost, firms want high profit – balance found naturally – invisible hand

14. Market responds efficiently to quickly changing conditionsMarket responds efficiently to quickly changing conditions –producers only make want consumers want at prices consumers will buy it Highest degree of economic freedom (choice)Highest degree of economic freedom (choice) Competition encourages innovation, innovation = growthCompetition encourages innovation, innovation = growth Consumer sovereignty: consumers decide what gets producedConsumer sovereignty: consumers decide what gets produced

15. No pure free market exists anywhere!No pure free market exists anywhere! Goals of economic equity (fairness) and economic security hard to achieveGoals of economic equity (fairness) and economic security hard to achieve Possible monopolies without government interventionPossible monopolies without government intervention