1. Do Now Activity In your own words describe a traditional economy.
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2. Objectives: Explain why markets exist.
Analyze a circular flow model of a free market economy.
Identify & examine the advantages of a free market economy.
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3. Market Simulation Take two pieces of yellow paper.
On one piece of paper, write a good that you can make good enough to sell it.
On the other piece of paper, write a service that you can provide good enough to sell.
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4. Section 2
The Free Market
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5. I. Why Markets Exist?
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6. A. Market
Any arrangement that allows buyers and sellers to exchange things they have for things they want.
Eliminates the need for any one person to be self-sufficient
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7. B. Specialization
Each of us specializes in a few products or services.
Concentration of the productive efforts of individuals & businesses on a limited number of activities.
Markets wouldn’t be necessary without specialization.
CQ: What are some examples?
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8. C. Buying and Selling
People earn income by specializing in particular jobs & selling goods.
The money earned is then used to buy the products that they want to consume.
CQ: What are some examples of this?
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9. II. Free Market Economy
Individuals and businesses make their own decisions about what to buy or sell.
Market economies are also known as capitalist economies.
Individuals and businesses privately own the factors of production.
Make what they want and buy what they want.
**Individuals answer the three economic questions.**
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11. A. Households and Firms
The participants in a free market economy are households and firms.
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12. 1) Household Person or group of people living in a single residence.
Own the factors of production
Consumers of goods and services
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13. 2) Firm
Business organization that uses resources to produce a product or service, which it sells.
Transform inputs (factors of production) into outputs (goods and services)
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14. 3) Circular Flow Model
Shows the exchange that takes place in a free market economy
Inner Ring
Shows the flow of resources and products
Outer Ring
Shows the flow of money
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18. B. Factor and Product Markets
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19. 1) Factor Market
When firms purchase factors of production from households
**Firms pay households for land, labor and capital**
Rent land
Hire workers
Borrow money
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20. 2) Product Market
When households buy the goods and services that firms produce.
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21. 3) Circular Flow
Households purchase the products made by firms with the money received from firms in the factor market.
The flow between the factor market and product market is circular.
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22. III. The Self-Regulating Nature of the Marketplace
Competition and our own self-interest keeps the market place functioning.
Start back with 8th period
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23. A. Self-Interest An individual’s own personal gain
Motivating force in the free market
It’s the push that leads people to act.
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24. 1) Adam Smith Published The Wealth of Nations (1776)
Described how markets function.
Defined the concept of self-interest.
“Give me that which I want, and you shall have this which you want…”
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25. B. Competition Struggle among producers for the dollars of consumers
Regulating force behind the free market
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26. 1) Incentive
The hope of reward or fear of penalty that encourages a person to behave in a certain way.
People respond to both positive and negative incentives.
CQ: What are some examples of positive and negative incentives?
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27. C. The Invisible Hand
The self-regulation of the marketplace, driven by self-interest and competition is known as the “invisible hand.”
Term coined by Adam Smith
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