Chapter 1: The Free Market System

method used by buyers and sellers to exchange goods and services
(Stock market, farmers market, mall, etc)
Free Market
when consumers and businesses sell and buy products w/a minimum of government restrictions
A free market is also called
free enterprise system
unlimited wants vs. limited resources
(biggest problem in every country)
inputs used to produce goods and services
natural resources provided by nature and used in production process
(gold, diamonds, oil)
mental and physical capacity of workers to produce goods and services
(people, workers, farmers, lawyers)
human goods that are used to produce other goods
(tools, factories, machinery, etc.)
business leader who seeks to make profits by combining resources to produce new goods/services
Liquid Capital
study of how society chooses to use its scarce resources for the production of goods to satisfy unlimited needs
branch that studies decision making for the economy as a whole
(unemployment, taxes, oil spill)
branch that studies decision making by individuals, families, or businesses
(price exchange of one product of one industry)
Who decides what is made?
1. Government
2. Producers
3. Consumers
Principle 1
right to own private property
(however government and bank can take your house away)
Principle 2
the profit motive
(revenue – expenses = profit)
Principle 3
(better prices, productions, and better service)
Principle 4
consumer sovereignty
(let the consumer be in charge)
Principle 5
Freedom of choice
Voluntary Exchange
buyers and sellers decide what to buy and sell with a minimum of government interference
Economic Freedom
voluntary exchange w/ right to make profit and own property
Economic Efficiency
Producing most goods/services from limited resources
Economic Security
secures against hardship, retired, disabled, unemployment, homeless
Economic Equity
everyone’s standard of living is not equal but the opportunity is the same
Full employment/stable prices
low unemployment so that people have money to buy products
(reasonable prices on necessities)
Economic Growth
improving the standard of living
Standard of Living
level of economic well being of the people
What to produce is determined by
consumer sovereignty
How to produce is determined by
labor vs. machinery
For whom to produce is determined by
Economic System
method used to answer the What, How, and Whom questions
Traditional Economy
copies the previous generations
(Amish, Natives)
Market Economy
no government involvement or central planning by government
(consumers/sellers control market)
Adam Smith
famous economist
Adam Smith’s famous book
The Wealth of the Nation
Invisible Hand
profit/competition keep the economy regulated
Market Economy is also called
Command Economy
a dictator or central authority decides
(government decides)
Mixed Economy
combination of command (government) and the market (the people)
When does the government interfere?
1. Safety
2. Pollution
3. Moral Decisions
4. Protection of natural resources