Unit 2:Economic Systems

Section 2:The Free Market

Advanced Societies The “Market”

› Any arrangement that permits producers (sellers) and consumers (buyers) to exchange goods and services

Characteristics of advanced societies› No one is self-sufficient› Specialization – doing one “special” thing

Easier for people to learn one thing Work is made more efficient as people get better

and better at it Businesses specialize to use resources more

efficiently

Free Market Economy

It’s “free” of government interference

Consumer Sovereignty› Individuals decide what they want to buy› Entrepreneurs decide what they will

produce They want to make a profit They need to make what the people want to

buy

Free Market Economy Cycle of wealth

(turn to page 31 in your text)

› Product market People (HOUSEHOLDS) pay money to get products

(goods and services) Businesses (FIRMS) sell products (goods and

services) to get the people’s money

› Factor Market People (HOUSEHOLDS) sell their resources

(land, labor, capital) to get money Businesses (FIRMS) give money to buy resources

(land, labor, capital)

Adam Smith

Economic Philosopher Trying to make the best system

› Productive› Efficient› Fair

Self-interest (greed) drives people and businesses

Work for incentives› Positive = good things/rewards› Negative = bad things/punishments

Adam Smith

Competition drives the system› Businesses compete for the dollars

Lower costs Improve quality Offer variety

› Customers compete for the dollars Best jobs Best bargains

The Invisible Hand drives the system to

become most efficient

Advantages of the Free Market

Efficient Economic freedom of choice Growth and ingenuity Variety of goods