CHAPTER 2 SECTION 2

Market-an arrangement that allows buyers and sellers to exchange things. Markets exist because no one is self-sufficient. Markets allow us to exchange things we have for things that we want.

House Holds And Firms The players in free market economy are house holds and firms. Household is a person or group living in the same residence. Households can own the factors of production , land, labor, and capital.

Factor Market A Firm is an organization that uses resources to produce a product Firms purchase factors of production from house holds. This exchange is known as factor market.

Factor payments- The income people receive for supplying factors of production, such as land, labor, or capital. Examples Being paid for labor costs Rent for a factory building

Product Market Profit is a financial gain made in transaction. Product market is the market in which goods are purchased by households.

The market economy is distinguished by individual choice to determine answers to the 3 key economic questions. Market economies are also called free markets. Capitalism is a term often used to describe a free market. This means that decisions are made in the marketplace and not through central planning.

Adam Smith Adam Smith was one of the first people to offer an explanation of how a market economy should work. He was a Scottish Philosopher who was greatly respected by his students and fellow professors.

Smiths Theory Smith identified land, labor, and capital as the factors of production that generate a nations wealth.

Invisible hand- term economists use to describe the self-regulating nature of the marketplace. Consumer Sovereignty- the power of consumers to decide what gets produced.

Incentive- an expectation that encourages people to behave in a certain way. Competition- the struggle among producers for the dollars of consumers

Self-Interest- one’s own personal gain in the economy

Advantages of a free market. Economic efficiency- Producers make only what consumers want. Economic Growth- Entrepreneurs are always seeking profitable opportunities.

Economic Freedom- Producers have the choice to make what they want, and consumers to purchase what they want. What is a Disadvantage of a Free Market Economy?

The biggest disadvantage of a market economy is that there are big gaps between the rich and poor

Specialization- the concentration of the productive efforts of individuals and firms on a limited number of activities. A free market is a self-regulating economic system directed by individuals acting in their own self-interest.

Ch2. Sec.2 Questions

How does specialization make us efficient? Question #1 How does specialization make us efficient?

Question #2 What is Profit?

Question #3 What is the difference between the factor market and the product market?

Question #4 What are the roles of households and firms in a market economy?

Question #5 How does competition among firms benefit consumers?

Question # 6 Explain what Adam Smith meant by “the invisible hand of market place”.

Question #7 What is the connection between incentives and consumer sovereignty in a free market.

Question # 8 Why is economic equality difficult to achieve in a free market economy?

Question # 9 What is Product Market?

Question # 10 Competition and what else helps to keep the market place functioning?