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2.2 THE FREE MARKET

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ECONOMICSMR. HOOD17 FEBRUARY 2014

2.2 THE FREE MARKET

ECONOMICSMR. HOOD`S NOTES17 FEBRUARY 2014

SECTION FOCUSMARKETS EXIST SO THAT PEOPLE CAN EXCHANGE WHAT THEY HAVE FOR WHAT THEY WANT. A FREE MARKET IS A SELF-REGULATING ECONOMIC SYSTEM DIRECTED BY INDIVIDUALS ACTING IN THEIR OWN SELF-INTEREST.

INTRODUCTION

M A R K E T S

BUYERS AND SELLERS EXCHANGE

THINGS

BUT WHY DO WE HAVE

MARKETS?

OBJECTIVE 1EXPLAIN WHY

MARKETS EXIST

NOBODY IS

SELF - SUFFICIENT

EACH OF US CAN PRODUCE JUST ONE OR A

FEW PRODUCTS

SPECIALIZATION IS CONCENTRATING ON A LIMITED

NUMBER OF ACTIVITIES

SPECIALIZATION LEADS TO EFFICIENT USE OF

RESOURCES

BUT SPECIALIZATION MEANS

WE NEED MARKETS

AND MARKETS ALLOW US TO EXCHANGE

THINGS

WE CAN BUY TO SUIT OUR NEEDS AND

WANTS

PEOPLE USUALLY EARN A SALARY TO BUY

THINGS

OBJECTIVE 2ANALYZE A

CIRCULAR FLOW MODEL OF A FREE MARKET ECONOMY

INDIVIDUALS AND PRIVATE BUSINESSES OWN FACTORS OF

PRODUCTION

INDIVUDUALS ANSWER 3 ECONOMIC QUESTIONS

MARKET ECONOMY REPRESENTED IN A CIRCULAR FLOW

DIAGRAM

FACTOR MARKET

HOUSEHOLDS SUPPLY FIRMS WITH LAND, LABOR,

CAPITAL

FIRMS PAY HOUSEHOLDS FOR LAND, LABOR,

CAPITAL

PRODUCT MARKET HOUSEHOLDS PAY FIRMS FOR GOODS AND

SERVICES

FIRMS SUPPLY HOUSEHOLDS WITH GOODS

AND SERVICES

OBJECTIVE 3UNDERSTAND THE SELF-REGULATING NATURE OF THE MARKETPLACE

WE LIVE IN A COMPETITVE

SOCIETY

BUYERS ONLY CONSIDER

SELF - INTEREST

BUYERS LOOK FOR

LOWEST PRICE

SELF INTEREST IS THE MOTIVATING

FORCE BEHIND THE FREE MARKET

COMPETITION IS THE REGULATING

FORCE

PRICES STAY LOW

QUALITY STAYS HIGH

SELF-INTEREST + COMPETITION

“THE INVISIBLE HAND”

NO NEED FOR GOVERNMENT

OBJECTIVE 4IDENTIFY THE

ADVANTAGES OF A FREE MARKET

ECONOMY

COMPETITION AND SELF-INTEREST SERVE

THE PUBLIC

MARKET RESPONDS QUICKY

TO CHANGES

MARKET PRODUCES ONLY WHAT CONSUMERS

WANT

WORKERS CAN WORK WHERE THEY WANT

PRODUCERS CAN

PRODUCE WHAT THEY WANT

ENTREPRENEURS ALWAYS SEEKING

NEW IDEAS

WIDE VARIETY OF GOODS AND SERVICES

AVAILABLE

CONSUMER SOVEREIGNTY

WE GET TO DECIDE WHAT IS

PRODUCED

BUT FREE MARKET IS ALSO WEAK

ECOMOMIC EQUITY AND SECURITY IS

DIFFICULT