Lesson 2 and 3 Free Markets and Centrally Planned Economics

 **market**

any arrangement that allows buyers and sellers to exchange things. 

Specialization

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

free market economy/capitalist economy

individuals answer what to produce, how to product it, and buy what they want, emphasis on individual and business, example US

**household**

a person or group of people living in a single residence.

business/firm

an organization that uses resources to produce a product or service, which it then sells.

factor market

The arena of exchange in which firms purchase factors of production from households. Ex: when firms purchase or rent land, they hire workers

**product market**

The arena in which households buy the goods and services that firms produce, Ex: when you buy food at a supermarket, you are taking part in the product market physical flow

**self-interest**

personal gain, the motivating force in the free market—the push that leads people to act.

**incentive**

hope of reward or fear of penalty that encourages a person to behave in a certain way. 

**competition**

the struggle among producers for the dollars of consumers, While self-interest is the motivating force behind the free market, competition is the regulating force.

**Price competition**

takes place when producers compete to offer the lowest price for a good that is identical to goods made by other producers. 

**Non-price competition** 

occurs when producers compete by offering higher-quality goods or goods with different features. 

free market advantages

efficient response, freedom of choice, variety of goods, growth and innovation

**centrally planned economy**

the government answers the three basic questions; a central bureaucracy decides what items to produce, how to produce them, and who gets them. 

**command economies**

oppose private property, free market pricing, competition, and consumer choice. 

**Socialism**

a range of economic and political systems based on the belief that wealth should be evenly distributed throughout society.

**communism**

the central government owns and controls all resources and means of production and makes all economic decisions. 

 **Authoritarian** governments

limit individual freedoms and require strict obedience from their citizens.