Chapter 2: Economic Systems Section 2 Slide 2Copyright © Pearson Education, Inc.Chapter 2, Section 2: Objectives 1.Explain why markets exist. 2.Analyze.

Chapter 2: Economic SystemsChapter 2: Economic SystemsSection 2Section 2

Chapter 2: Economic SystemsChapter 2: Economic SystemsSection 2Section 2

Slide 2Copyright © Pearson Education, Inc.Chapter 2, Section 2:

ObjectivesObjectives

1. Explain why markets exist.

2. Analyze a circular flow model of a free market economy.

3. Describe the self-regulating nature of the marketplace.

4. Identify the advantages of a free market economy.

Slide 3Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Debate time!Debate time!

Once formed into two groups, you will be either be FOR GOVERNMENT INTERVENTION or ANTI-GOVERNMENT INTERVENTION

You and your group will prepare to debate against another group on why you feel strongly on the following:

FOR GOVERNMENT INTERVENTION (affirmative)

ANTI-GOVERNMENT INTERVENTION (negative)Both pertaining to intervention in our market economy

Intervention = could be any influence at all

Slide 4Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Debate time!Debate time!

-1st affirmative speech. 3 min (one speaker)

Cross examination 2 min (one speaker grills prev. speaker)

-1st negative speech. 3 min (one speaker)

Cross examination 2 min (one speaker grills prev. speaker)

-2nd affirmative speech. 3 min (new speaker)

Cross examination 2 min (new speaker grills)

-2nd negative speech. 3 min (new speaker)

Cross examination 2 min (new speaker grills)

--4 minute rebuttal prep—

-Negative rebuttal. 2 min (new speaker)

-Positive rebuttal. 2 min (new speaker)

Slide 5Copyright © Pearson Education, Inc.Chapter 2, Section 2:

What do they all have in common?What do they all have in common?

Slide 6Copyright © Pearson Education, Inc.Chapter 1, Opener

MarketsMarkets

MarketsAny arrangement that allows buyers and sellers to exchange things

Markets allow us to exchange the things we have for the things we want

Slide 7Copyright © Pearson Education, Inc.Chapter 1, Opener

SpecializationSpecialization

SpecializationConcentration of the productive efforts of individuals and businesses on a limited number of activities

Typically, is a jeweler going to be a farmer on the side? Is a baker going to have an auto-body shop as well?

Specialization leads to efficient use of capital, land and labor…it is easier for people to learn one task or a few very well rather than many.

Slide 8Copyright © Pearson Education, Inc.Chapter 1, Opener

Specialization Specialization

• Suppose you have a English teacher who is married with no kids compared to an English teacher who is married with four kids and is the head football coach. Who do you feel will have better lessons prepared? Why?

Slide 9Copyright © Pearson Education, Inc.Chapter 1, Opener

Specialization Specialization

• Suppose there is a florist who also owns a greenhouse business compared to a florist who owns a company that gives hot air balloon rides. With all factors being the same, who’s floral business will do better? Why?

Slide 10Copyright © Pearson Education, Inc.Chapter 2, Section 2:

SpecializationSpecialization

Because of specialization, markets are needed to give people an arena with which to sell their products and to buy products that they don’t produce themselves but need.

Slide 11Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Specialization ActivitySpecialization Activity• Each student to get five squares of paper• On each piece, silently write one good or

service on each piece….do it, now!• What you wrote is what you specialize in

making/doing• Volunteer do your thang..• Was this an example of a market? Why or why

not?– It was because people were exchanging goods or

services they provided for what they wanted.

Slide 12Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Free Market Economy Free Market Economy

• The US has many traits of a free market economy.

• What are the characteristics of a free market economy?– A free market economy is characterized by:

• Households and firms• Factor and product markets• Self-interest• Competition• Economic freedom, efficiency, and equity

Slide 13Copyright © Pearson Education, Inc.Chapter 2, Section 2:

The Purpose of MarketsThe Purpose of Markets

• Checkpoint: Why do markets exist? – Markets, like a farmer’s market, a sporting goods store,

and the New York Stock Exchange, eliminate the need for any one person to be self-sufficient.

– Markets allow us to exchange the things we have for the things we want.

Slide 14Copyright © Pearson Education, Inc.Chapter 1, Opener

Free Market EconomyFree Market Economy

Free market economyThe three key economic questions are answered by voluntary exchange in the marketplace.

Choices made by individuals determine what gets made, how it is made, and how much people can consume of the goods and services produced.

In a free market system, individuals and privately owned businesses own the factors of production.

Slide 15Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Circular Flow Model of a Market EconomyCircular Flow Model of a Market Economy

Slide 16Copyright © Pearson Education, Inc.Chapter 1, Opener

Circular FlowCircular Flow

• Flowmarket

Slide 17Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Households and FirmsHouseholds and Firms

• Household - person or group of ppl living in a single residence

• Firm- Organization that uses resources to produce a product/service which it then sells

Slide 18Copyright © Pearson Education, Inc.Chapter 1, Opener

Factor and Product MarketFactor and Product Market

Factor marketArea of exchange where firms purchase F.O.P from households.

Firms purchase factors of production, such as renting land, hiring and paying workers, and borrowing money from households.

How do firms borrow money from households???

Stocks/bonds!

Slide 19Copyright © Pearson Education, Inc.Chapter 1, Opener

Factor and Product MarketFactor and Product Market

Product marketArea of exchange where households purchase goods/services from firms

Slide 20Copyright © Pearson Education, Inc.Chapter 1, Opener

Flow Market Flow Market

• Handout

Slide 21Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Self-InterestSelf-Interest

• In The Wealth of Nations, Adam Smith observes that in the countless transactions that occur in the market, the buyer and seller consider only their self-interest.– Self-interest - is an individual’s own personal

gain• It is the motivating force in the free market.

– Consumers pursuing their self-interest have the incentive to look for lower prices.

Slide 22Copyright © Pearson Education, Inc.Chapter 2, Section 2:

CompetitionCompetition

IncentiveEncourages a person to behave in a certain way

• Incentives

Slide 23Copyright © Pearson Education, Inc.Chapter 2, Section 2:

What are Incentives?What are Incentives?

Slide 24Copyright © Pearson Education, Inc.Chapter 2, Section 2:

BreakdownBreakdown• We buy what we want (self-interest)• Firms make what we want – they want $$$• Competition among firms causes them to produce more and

keep prices low• In the end, everyone is happy!• How does this work without any central planning,

government intervention or direction?

Slide 25Copyright © Pearson Education, Inc.Chapter 2, Section 2:

The Invisible HandThe Invisible Hand

• Invisible Hand – Term coined by Adam Smith describing the self-regulating nature of the marketplace

.

Slide 26Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Chapter 2.2Chapter 2.2

• Checkpoint: Why is competition important to the free market?– Firms seek to make higher profits by

increasing sales.– Self-interest and competition work together to

regulate the marketplace.– Smith called this self-regulating mechanism of

the market “the invisible hand.”

Slide 27Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Advantages of a Free MarketAdvantages of a Free Market

• Economic efficiency– Producers only make what

they can sell• Economic freedom

– People do what they want• Economic growth

– Competition encourages innovation

• Additional goals– Consumer Sovereignty-

the power of consumers to decide what gets produced

Slide 28Copyright © Pearson Education, Inc.Chapter 2, Section 2:

Advantages, cont.Advantages, cont.

• Despite the advantages of a free market economy, no country today operates under a pure, unregulated free market.

Slide 29Copyright © Pearson Education, Inc.Chapter 2, Section 2:

ReviewReview

• Now that you have learned the characteristics of a free market economy, let’s go back and answer the Chapter Essential Question.– How does a society decide who gets what

goods and services?