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

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

1. What goods will be 1. What goods will be produced?produced?

--In a market economy, business In a market economy, business firms produce the goods that firms produce the goods that consumers want to buy.consumers want to buy.

Ex. Ex. Car companies produce the style of Car companies produce the style of

car they think people will buy, not car they think people will buy, not something ugly that no one would something ugly that no one would want.want.

2. How will these 2. How will these goods be produced?goods be produced? The individuals who own and manage The individuals who own and manage

the business decide how goods will be the business decide how goods will be produced.produced.

Ex: If owners want to use machinery to Ex: If owners want to use machinery to produce a good they will buy it. If they produce a good they will buy it. If they want manual labor they will seek out want manual labor they will seek out employees who are willing to perform employees who are willing to perform the task that they need.the task that they need.

3. For whom will the 3. For whom will the good be produced?good be produced?

--Goods are produced for people Goods are produced for people who are willing and able to buy who are willing and able to buy them.them.

-It takes both -It takes both willingnesswillingness and and abilityability

Five Features of a Five Features of a Market EconomyMarket Economy

1. Private property1. Private property

2.Choice (freedom to choose)2.Choice (freedom to choose)

3. Voluntary exchange3. Voluntary exchange

4. Competition4. Competition

5. Economic Incentives 5. Economic Incentives

1. Private Property1. Private Property

Private vs. Public propertyPrivate vs. Public property

-your car, hour, or factory vs. -your car, hour, or factory vs. Statue of LibertyStatue of Liberty

-2005 Kelo vs. New London (read -2005 Kelo vs. New London (read aloud pg 58)aloud pg 58)

2. Choice (freedom to 2. Choice (freedom to Choose)Choose) Key element in free enterprise.Key element in free enterprise. Workers have the right to choose Workers have the right to choose

what they want to do and for what they want to do and for whom. whom.

Businesses have right to choose Businesses have right to choose the products they produce and the products they produce and offer for sale.offer for sale.

Buyers have right to choose what Buyers have right to choose what they purchase.they purchase.

3. Voluntary Exchange3. Voluntary Exchange

Individuals have the right to make Individuals have the right to make exchanges or trades they believe will exchanges or trades they believe will make them better off. make them better off.

Ex. I have $10, Ken has a book, and we Ex. I have $10, Ken has a book, and we trade. We conclude I believe I am trade. We conclude I believe I am better off having the book than $10 better off having the book than $10 and Ken believes he is better off with and Ken believes he is better off with the $10 instead of the book. the $10 instead of the book.

4. Competition4. Competition

In a market system we are free In a market system we are free to compete with each other.to compete with each other.

Consumers are likely to benefit Consumers are likely to benefit from competition because of from competition because of lower prices and more goods to lower prices and more goods to pick from.pick from.

As a worker you benefit or lose As a worker you benefit or lose depending on the job market.depending on the job market.

5. Economic Incentives5. Economic Incentives

Def: something that encourages Def: something that encourages or motivates a person towards an or motivates a person towards an action. action.

Ex. in F.E.: money to produce a Ex. in F.E.: money to produce a goodgood

Circular Flow DiagramCircular Flow Diagram

Open books to page 60.Open books to page 60.

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

What does the picture What does the picture show?show? Who the key players are in the Who the key players are in the

economyeconomy The relationship they have with The relationship they have with

each othereach other Ways in which they interactWays in which they interact

Explain the diagram…Explain the diagram…

Why is the Circular Why is the Circular Flow diagram useful?Flow diagram useful? Walk through examples on page 60 in Walk through examples on page 60 in

the book:the book:

Helps us see how a change in one Helps us see how a change in one economic activity (such as paying economic activity (such as paying taxes) will lead to a change somewhere taxes) will lead to a change somewhere else in the economy (such as the else in the economy (such as the amount households spend on goods amount households spend on goods and services produced by businesses)and services produced by businesses)