• Please pull out your notes from Please pull out your notes from yesterday – the one that’s folded yesterday – the one that’s folded about “Economic Systems”about “Economic Systems”

• Respond to the following in your DNA Respond to the following in your DNA log:log:

• Describe 2 basic differences between Describe 2 basic differences between a Traditional Economy and a Market a Traditional Economy and a Market Economy …Economy …

• MarketMarket: an arrangement that allows : an arrangement that allows buyers and sellers to exchange buyers and sellers to exchange thingsthings

• Exist because no one is self-sufficientExist because no one is self-sufficient• Allow us to exchange things we have Allow us to exchange things we have

for things we want for things we want

Specialization Specialization • Each of us produces just one/a few Each of us produces just one/a few

products (not everything)products (not everything)• SpecializationSpecialization: concentration of : concentration of

productive efforts of individuals and productive efforts of individuals and firms on a firms on a limited numberlimited number of activities of activities

• Leads to Leads to efficientefficient use of resources use of resources

Buyers & SellersBuyers & Sellers: Because we each : Because we each specialize, we need markets to sell specialize, we need markets to sell what we have to buy what we wantwhat we have to buy what we want

• Based on voluntary exchanges btwn Based on voluntary exchanges btwn buyers & sellers in marketsbuyers & sellers in markets

• Can represent Free Market with Can represent Free Market with circular circular flowflow diagram diagram

– Shows how money, resources, & products Shows how money, resources, & products flow through economyflow through economy

Players: Players: • HouseholdHousehold: person/group of people : person/group of people

living in same residenceliving in same residence– Own factors of productionOwn factors of production– Consumers of goods & servicesConsumers of goods & services

• FirmsFirms: business or organization that : business or organization that uses resources to produce then sell a uses resources to produce then sell a productproduct

HOUSEHOLDS

FIRMS

MARKET for MARKET for GOODS & GOODS & SERVICESSERVICES

MARKET for MARKET for FACTORS OF FACTORS OF PRODUCTIOPRODUCTIO

NN

Spending $Revenue

Wages, Rent, Profit

Income

Goods & services bought

Labor, land &capital

Factors of production

Goods & services sold

6 basic characteristics6 basic characteristics

I.I. Little or No Government ControlsLittle or No Government Controls

II.II. Freedom of EnterpriseFreedom of Enterprise

III.III.Freedom of ChoiceFreedom of Choice

IV.IV.Private PropertyPrivate Property

V.V. Profit IncentiveProfit Incentive

VI.VI.Competition & Self-InterestCompetition & Self-Interest

• Gov’t has Gov’t has laissez fairelaissez faire policy (policy (let let them dothem do) – ) – non-interventionnon-intervention in in economyeconomy

• Gov’ts role is to protect property rights, Gov’ts role is to protect property rights, maintain order & civility, enforce maintain order & civility, enforce contracts – contracts – That’s it!That’s it!

• No central gov’t planningNo central gov’t planning

• Free EnterpriseFree Enterprise: Individuals & : Individuals & privately privately owned owned businesses own factors of businesses own factors of productionproduction

• Businesses & entrepreneurs make what Businesses & entrepreneurs make what they want they want

• Consumers buy what they wantConsumers buy what they want

• Buyers & Consumers influence Buyers & Consumers influence decisions about what is produced by decisions about what is produced by dollar “votes”dollar “votes”

– Why they buy more will be produced moreWhy they buy more will be produced more

• Have a right to own private propertyHave a right to own private property• If you own a business, profit is your If you own a business, profit is your

propertyproperty

• IncentiveIncentive = any factor that motivates a = any factor that motivates a particular actionparticular action

• Firms’ goal = to make $$ (profits) by Firms’ goal = to make $$ (profits) by increasing salesincreasing sales

• ConsumersConsumers expected to respond to expected to respond to positive incentive of lower prices by positive incentive of lower prices by buying morebuying more

CompetitionCompetition: struggle among producers : struggle among producers for dollars from consumerfor dollars from consumer

• Leads to lower prices as consumers Leads to lower prices as consumers choose from among rival producerschoose from among rival producers

ADAM SMITH ADAM SMITH • Buyers’ and sellers’ self-interest (desire Buyers’ and sellers’ self-interest (desire

for personal gain) motivate free marketfor personal gain) motivate free market• Consumers have Consumers have incentiveincentive to look for to look for

lower prices lower prices

ADAM SMITH ADAM SMITH • Wrote Wrote Wealth of NationsWealth of Nations 1776, 1776,

described how pure free market worksdescribed how pure free market works• Consumers want low cost, firms want Consumers want low cost, firms want

high profit – balance found naturally – high profit – balance found naturally – invisible handinvisible hand

• Market responds efficiently to quickly Market responds efficiently to quickly changing conditionschanging conditions

– producers only make want consumers producers only make want consumers want at prices consumers will buy itwant at prices consumers will buy it

• Highest degree of economic freedom Highest degree of economic freedom (choice)(choice)

• Competition encourages innovation, Competition encourages innovation, innovation = growthinnovation = growth

• Consumer sovereigntyConsumer sovereignty: : consumers consumers decide what gets produced decide what gets produced

• No pure free market exists No pure free market exists anywhere!anywhere!

• Goals of economic equity (fairness) Goals of economic equity (fairness) and economic security hard to and economic security hard to achieveachieve

• Possible monopolies without Possible monopolies without government interventiongovernment intervention