The Free Market Economy

factor market

where the firms purchase the factors of production from the households

product market

where households purchase goods and services from the firms

firm

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

household

a person or group of people living in the same residence

Who is Adam Smith?

- published a book titled The Wealth of Nations
- believed that self-interest and competition keep the marketplace functioning

What three economic questions must individuals answer?

1. What to produce
2. How to produce it
3. Who consumes what is produced

Individuals and privately owned businesses own what?

the factors of production, make what they want, and buy what they want

How do Markets address this lack of self-sufficiency?

With the use of specialization

Specialization

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

Self-Interest

another term for personal gain

Incentive

the hope of reward or the fear of punishment that encourages a person to behave in a certain way

Laissez Faire

Hands off buisness

Competition

considered to be the regulatory force of a free market

The Invisible Hand

the term economists use to describe the self-regulating nature of the marketplace

Advantages to the US form of a market economy

economic efficiency, economic freedom, economic growth

Disadvantages to the US form of a market economy

only those with resources can participate, the income gap, the market doesn’t answer all questions...defense, education