Characteristics of a Market Economy (aka Free Enterprise and Capitalism)

How does a Markey economy answer the 3 Economic ?’s

1. What goods will be produced? -In a market economy, business firms produce the goods that consumers want to buy. Ex. Car companies produce the style of car they think people will buy, not something ugly that no one would want.

2. How will these goods be produced? The individuals who own and manage the business decide how goods will be produced. The individuals who own and manage the business decide how goods will be produced. Ex: If owners want to use machinery to produce a good they will buy it. If they want manual labor they will seek out employees who are willing to perform the task that they need.

3. For whom will the good be produced? -Goods are produced for people who are willing and able to buy them. -It takes both willingness and ability

Five Features of a Market Economy 1. Private property 2.Choice (freedom to choose) 3. Voluntary exchange 4. Competition 5. Economic Incentives

1. Private Property Private vs. Public property Private vs. Public property -your car, hour, or factory vs. Statue of Liberty Kelo vs. New London (read aloud pg 58)

2. Choice (freedom to Choose) Key element in free enterprise. Key element in free enterprise. Workers have the right to choose what they want to do and for whom. Workers have the right to choose what they want to do and for whom. Businesses have right to choose the products they produce and offer for sale. Businesses have right to choose the products they produce and offer for sale. Buyers have right to choose what they purchase. Buyers have right to choose what they purchase.

3. Voluntary Exchange Individuals have the right to make exchanges or trades they believe will make them better off. Individuals have the right to make exchanges or trades they believe will make them better off. Ex. I have $10, Ken has a book, and we trade. We conclude I believe I am better off having the book than $10 and Ken believes he is better off with the $10 instead of the book. Ex. I have $10, Ken has a book, and we trade. We conclude I believe I am better off having the book than $10 and Ken believes he is better off with the $10 instead of the book.

4. Competition In a market system we are free to compete with each other. In a market system we are free to compete with each other. Consumers are likely to benefit from competition because of lower prices and more goods to pick from. Consumers are likely to benefit from competition because of lower prices and more goods to pick from. As a worker you benefit or lose depending on the job market. As a worker you benefit or lose depending on the job market.

5. Economic Incentives Def: something that encourages or motivates a person towards an action. Def: something that encourages or motivates a person towards an action. Ex. in F.E.: money to produce a good

Circular Flow Diagram Open books to page 60. Open books to page 60. Much of what the Free Enterprise economy has to do with is how the key economic sectors-gov’t, business, and households-deal with each other. Much of what the Free Enterprise economy has to do with is how the key economic sectors-gov’t, business, and households-deal with each other.

What does the picture show? Who the key players are in the economy Who the key players are in the economy The relationship they have with each other The relationship they have with each other Ways in which they interact Ways in which they interact

Explain the diagram…

Why is the Circular Flow diagram useful? Walk through examples on page 60 in the book: Walk through examples on page 60 in the book: Helps us see how a change in one economic activity (such as paying taxes) will lead to a change somewhere else in the economy (such as the amount households spend on goods and services produced by businesses) Helps us see how a change in one economic activity (such as paying taxes) will lead to a change somewhere else in the economy (such as the amount households spend on goods and services produced by businesses)