2. Chapter 2: Economic Systems Section 2

3. Slide 2Copyright © Pearson Education, Inc.Chapter 2, Section 2: Objectives 1.Explain why markets exist. 2.Analyze a circular flow model of a free market economy. 3.Describe the self-regulating nature of the marketplace. 4.Identify the advantages of a free market economy.

4. Slide 3Copyright © Pearson Education, Inc.Chapter 2, Section 2: Debate time! Once formed into two groups, you will be either be FOR GOVERNMENT INTERVENTION or ANTI- GOVERNMENT INTERVENTION You and your group will prepare to debate against another group on why you feel strongly on the following: FOR GOVERNMENT INTERVENTION (affirmative) ANTI-GOVERNMENT INTERVENTION (negative) Both pertaining to intervention in our market economy Intervention = could be any influence at all

5. Slide 4Copyright © Pearson Education, Inc.Chapter 2, Section 2: Debate time! -1 st affirmative speech. 3 min (one speaker) Cross examination 2 min (one speaker grills prev. speaker) -1 st negative speech. 3 min (one speaker ) Cross examination 2 min (one speaker grills prev. speaker) -2 nd affirmative speech. 3 min (new speaker) Cross examination 2 min (new speaker grills) -2 nd negative speech. 3 min (new speaker) Cross examination 2 min (new speaker grills) --4 minute rebuttal prep— -Negative rebuttal. 2 min (new speaker) -Positive rebuttal. 2 min (new speaker)

6. Slide 5Copyright © Pearson Education, Inc.Chapter 2, Section 2: What do they all have in common?

7. Slide 6 Copyright © Pearson Education, Inc.Chapter 1, Opener Markets Any arrangement that allows buyers and sellers to exchange things Markets allow us to exchange the things we have for the things we want

8. Slide 7 Copyright © Pearson Education, Inc.Chapter 1, Opener Specialization Concentration of the productive efforts of individuals and businesses on a limited number of activities Typically, is a jeweler going to be a farmer on the side? Is a baker going to have an auto-body shop as well? Specialization leads to efficient use of capital, land and labor…it is easier for people to learn one task or a few very well rather than many.

9. Slide 8 Copyright © Pearson Education, Inc.Chapter 1, Opener Specialization Suppose you have a English teacher who is married with no kids compared to an English teacher who is married with four kids and is the head football coach. Who do you feel will have better lessons prepared? Why?

10. Slide 9 Copyright © Pearson Education, Inc.Chapter 1, Opener Specialization Suppose there is a florist who also owns a greenhouse business compared to a florist who owns a company that gives hot air balloon rides. With all factors being the same, who’s floral business will do better? Why?

11. Slide 10Copyright © Pearson Education, Inc.Chapter 2, Section 2: Specialization Because of specialization, markets are needed to give people an arena with which to sell their products and to buy products that they don’t produce themselves but need.

12. Slide 11Copyright © Pearson Education, Inc.Chapter 2, Section 2: Specialization Activity Each student to get five squares of paper On each piece, silently write one good or service on each piece….do it, now! What you wrote is what you specialize in making/doing Volunteer do your thang.. Was this an example of a market? Why or why not? –It was because people were exchanging goods or services they provided for what they wanted.

13. Slide 12Copyright © Pearson Education, Inc.Chapter 2, Section 2: Free Market Economy The US has a free market economy. What are the characteristics of a free market economy? –A free market economy is characterized by: Households and firms Factor and product markets Self-interest Competition Economic freedom, efficiency, and equity

14. Slide 13Copyright © Pearson Education, Inc.Chapter 2, Section 2: The Purpose of Markets Checkpoint: Why do markets exist? –Markets, like a farmer’s market, a sporting goods store, and the New York Stock Exchange, eliminate the need for any one person to be self-sufficient. –Markets allow us to exchange the things we have for the things we want.

15. Slide 14 Copyright © Pearson Education, Inc.Chapter 1, Opener Free Market Economy Free market economy The three key economic questions are answered by voluntary exchange in the marketplace. Choices made by individuals determine what gets made, how it is made, and how much people can consume of the goods and services produced. In a free market system, individuals and privately owned businesses own the factors of production.

16. Slide 15Copyright © Pearson Education, Inc.Chapter 2, Section 2: Circular Flow Model of a Market Economy

17. Slide 16 Copyright © Pearson Education, Inc.Chapter 1, Opener Circular Flow Flowmarket

18. Slide 17Copyright © Pearson Education, Inc.Chapter 2, Section 2: Households and Firms Household - person or group of ppl living in a single residence Firm- Organization that uses resources to produce a product/service which it then sells

19. Slide 18 Copyright © Pearson Education, Inc.Chapter 1, Opener Factor and Product Market Factor market Area of exchange where firms purchase F.O.P from households. Firms purchase factors of production, such as renting land, hiring and paying workers, and borrowing money from households.

20. Slide 19 Copyright © Pearson Education, Inc.Chapter 1, Opener Factor and Product Market Product market Area of exchange where households purchase goods/services from firms

21. Slide 20 Copyright © Pearson Education, Inc.Chapter 1, Opener Flow Market Handout

22. Slide 21Copyright © Pearson Education, Inc.Chapter 2, Section 2: Self-Interest In The Wealth of Nations, Adam Smith observes that in the countless transactions that occur in the market, the buyer and seller consider only their self-interest. –Self-interest - is an individual’s own personal gain It is the motivating force in the free market. –Consumers pursuing their self-interest have the incentive to look for lower prices.

23. Slide 22Copyright © Pearson Education, Inc.Chapter 2, Section 2: Competition Incentive Encourages a person to behave in a certain way Incentives

24. Slide 23Copyright © Pearson Education, Inc.Chapter 2, Section 2: What are Incentives?

25. Slide 24Copyright © Pearson Education, Inc.Chapter 2, Section 2: Breakdown We buy what we want (self-interest) Firms make what we want – they want $$$ Competition among firms causes them to produce more and keep prices low In the end, everyone is happy! How does this work without any central planning, government intervention or direction?

26. Slide 25Copyright © Pearson Education, Inc.Chapter 2, Section 2: The Invisible Hand Invisible Hand – Term coined by Adam Smith describing the self- regulating nature of the marketplace.

27. Slide 26Copyright © Pearson Education, Inc.Chapter 2, Section 2: Chapter 2.2 Checkpoint: Why is competition important to the free market? –Firms seek to make higher profits by increasing sales. –Self-interest and competition work together to regulate the marketplace. –Smith called this self-regulating mechanism of the market “the invisible hand.”

28. Slide 27Copyright © Pearson Education, Inc.Chapter 2, Section 2: Advantages of a Free Market Economic efficiency –Producers only make what they can sell Economic freedom –People do what they want Economic growth –Competition encourages innovation Additional goals –Consumer Sovereignty- the power of consumers to decide what gets produced

29. Slide 28Copyright © Pearson Education, Inc.Chapter 2, Section 2: Advantages, cont. Despite the advantages of a free market economy, no country today operates under a pure, unregulated free market.

30. Slide 29Copyright © Pearson Education, Inc.Chapter 2, Section 2: Review Now that you have learned the characteristics of a free market economy, let’s go back and answer the Chapter Essential Question. –How does a society decide who gets what goods and services?