Objectives:
1. Explain why markets exist.
2. Analyze a circular flow model of a free market economy.
3. Understand the self-regulating nature of the marketplace.
4. Identify the advantages of a free market economy.
--------------------------------------------------------------------------------------------------------------------*What does a farmers’ market, a sporting goods store, the New York Stock Exchange, and the sign you
post on your community bulletin board advertising baby-sitting services have in common?
*All are __________________ of ___________________.
*A market is an _____________________ that allows ______________ and _____________________
to _________________________________
 Why Markets Exist:
 Markets exist because no one is ___________________________.
 None of us produces all that we ____________________________________ our needs
and wants.
 We don’t grow many of the things we __________, we buy them at a _________.
 Markets allow us to exchange the things we __________ for the things we __________.
 Instead of being self-sufficient, each of us produces just __________________ products.
 _______________– the concentration of the productive efforts of individuals and firms
on a limited number of activities.
 Specialization makes us more _______________.
 It is easier to learn one task or a few tasks very well than to learn all the tasks we need.
 We need markets to sell what we have and to buy what we want.
 ___________________________:
 Economic systems that are based on _____________________________ in markets are
called ______________________
 Individuals and businesses use markets to exchange _________ and _____________.
 Individuals answer the three key economic questions.
 This type of economy functions best in a system of ______________________________
governments (like U.S.)
 We can represent a free market economy in a special kind of drawing called a
______________________________________.
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 A Circular Flow diagrams shows at a glance how individuals and businesses exchange
___________, __________________, and ____________________ in the marketplace.
 The inner ring of the diagram represents the flow of ____________________________.
 The outer ring of the diagram represents the flow of _________________.
______________________ – are a person or group of people living in the same residence.
Households own the ________________________________ – land, labor, and capital.
_____________________ o r ________ – an organization that uses resources to produce a
product which it then sells.
Firms transfer “____________” or factors of production into “____________” or products.
Factor Markets - arena of exchange.
 _______________ is the financial gain made in a transaction.
 All businesses want a profit to stay in business.
Circular Flow of Economic Activity
The Self-Regulating Nature of the Marketplace:
How is it that firms and households cooperate to give each other what they want –
_________________________ and __________________________.
______________ said competition and our own self-interest is what keeps the marketplace
functioning.
1. ________________________
 In 1776 – Adam Smith published a book entitled “_______________________”
 He described how the ___________________________.
 He observed that an economy is made up of countless individual ____________.
 In each transaction, the buyer and seller consider only their self-interest or their
____________________________________.
 Self-interest is the ______________________ in the free world.
2. __________________________
 Consumers (households) in pursuit of their self-interest, have the incentive to
look for the _______________________.
 An incentive is the hope of reward or the fear of punishment that encourages a
person to behave in a certain way.
 Smith observed that people respond predictably to both ____________ and
__________________ incentives.
 As for consumers – we expect they will buy more of an item if the price is lower.
Vice-Versa, they will buy less of an item if the price is higher.
 Consumers, pursuing their self-interest will buy the lower priced item most of the
time.
 Economists call this struggle among ___________ for the dollars of consumers –
________________________.
3. __________________________
 Self-interest and competition work together to ________________ the
_____________________.
 The overall result is that consumers get the products they want at the _________
that closely affect the cost of producing them.
Advantages of a Free Market:
1.
2.
3.
4. Additional Goals
 Consumers, in essence, decide what gets produced – called
______________________________
REVIEW:
1. How does specialization make us more efficient?
2. What is the difference between the factor market and the product market?
3. What is profit?
4. What are the roles of households and firms in a market economy?
5. How does competition among firms benefit consumers?
6. Explain what Adam Smith meant by “the invisible hand of the marketplace.”
7. What is the connection between incentives and consumer sovereignty in a free market
economy?