THE FREE MARKET

THE FREE MARKET• A Market is an arrangement that allows

buyers and sellers to exchange things.– Stock market

– Flea market

– Grocery market

– Auto parts store

– Clothing store

– Mall

– Markets exist because no one can supply themselves with all the goods and services they need. (Our needs or many our wants are _____?)

• Economic systems that are based on voluntary exchanges in markets are called Free Markets.

• In a Free Market System individuals own the Factors of Production, land, labor, & capital.

• In a Free Market System individuals answer the Three Economic Questions– __________________?– __________________?– __________________?

• The Free Market exists or works well because of specialization, the concentration of ones efforts on a limited number of goods and services. In specialization– People or firms provide in a better

capacity what others need or want.

• The Free Market arranges for people specializing in a limited number of goods to connect with others specializing in other goods and services to meet their needs or wants. (buying & selling).

•BE READY TO RECALL, REMEMBER, AND GIVE BACK ALL OF THE INFORMATION ON THE NEXT THREE SLIDES!!!!!!!

• Households, a person or group living in the same residence owns the factors of production, land labor, & capital.

• Firms are organizations that uses resources to produce a product which it sells. – Firms utilize your factors of

production, (labor, capital, & land) to produce products or services which it sells to meet your needs or wants.

– This is called the Factor Market

– This is called the Factor Market• Your education, labor, & skills are resources

that firms can use to produce products or services which they can sell.

• A market exists for your labor, skills, education etc. (example a football player or musician)

• A profit, the financial gain made in a transaction, is the goal in the factor market.

– A wage (profit) is earned by a household in the factor market.

– A profit is earned by the firms. The Product Market is, goods & services that firms produce and are purchased by households.• Firms hire factors of production to produce

products.

Labor & human capital

Goods & services

Factor payments

Wages. Money flow

Money flows back into the factory

FACTOR MARKET

PRODUCT MARKET

The Self-Regulating Nature of the Free

Market

• Assuming that you found out that Thirty full scholarships to any school were being offered to Hutchings Seniors. Would you…

A. Call your fellow classmates and go downtown together.

B. Go downtown and get your scholarship first and then call your classmate.

C. Call your classmate while you are already on your way.

• If you answered B or C you are mostly concerned about your self-interest! Ha! Ha!

• Self-Interest, being concerned about own personal gain, is a motivating force of the free market system. – The consumer is interested in how much

can I save?– The producer is interested in how much

can I make?

• Competition balances the self-interest of both by forcing two or more producers to fight (compete) for the dollars of consumers.

• The Incentives for the producer is the fear of losing business and the hope of making a profit.

• The Incentives for the consumer is the reward of getting a need or want met and overcoming the fear of losing too much money.

• No one tells producers what to charge for their products or consumers what to pay. The desire to protect ones own interest and the fear of losing a profit becomes the “Invisible Hand” that regulates the Free Market.

• Adam Smith – was one of the first philosophers to offer an explanation of how a market economy works.– Laissez Faire – Smith coined this

French term which means “to leave alone,” or “Let them do as they please.”

– Smith contends that people’s self-interest will drive them to produce more goods and services, more jobs, and better riches.

– The market doesn’t need government control because the “Invisible Hand” is regulating the market.

• Question for thought – If Smith was alive today do you think that he would apply the Free Market system to the national health care crisis as opposed to a government run health care system? Why? Why not? How?

• Advantages of the Free Market– Economic Efficiency – Scarce

resources gets maximized.– Economic Freedom- People make

their own economic choices without interference from government.

– Economic Growth & Innovation-innovations increase efficiency and our quality of life.

– Additional goals•Consumer sovereignty – consumers

decide what goods and services are to be produced. (see board)

• Disadvantages of the Free Market– The well of gets better and the poor

gets poorer– Uneven Distribution Of Wealth– No Consumer Protection because…

•Government does not regulate.•Truth in Lending is not Mandatory.•Safety is left up to the producer.•Monopolies become a normality.

– What other disadvantages can you think of?