WARM-UP

1. The Internet is considered a Free Market – tell me 5 ways that the internet has changed our economy?

EconCh 2.2

The Free Market

Markets

• A market is an arrangement that allows buyers and sellers to _________ thingsexchangeexchange

1. Workers increase their education and training and become more productive.

• An increase in production will cause the economy to grow and the circular flow model will move faster.

Circular Flow For each example below, predict whether the event should cause the economy to increase or decrease production and consumption of goods and services

If people have better or more productive skills, they can produce ______ goods and services with all of the other resources. If they can produce _______with the same __________, production costs will ___________, businesses will be more willing to increase production, and consumers will _________ more. If more goods are produced and consumed, the economy________.

moremore resources

decreasepurchase

grows

2. Many new technologies and inventions reduce the

costs of production • An increase in product

ion will cause the economy to grow and the circular flow model will move faster.

New technologies make it _______ and _________ to produce goods and services. ________ costs will be an incentive for businesses to produce more goods and services. If more goods and services are available, prices may _________ and consumers will purchase more.

easier cheaperLower

decrease

• An increase in production will cause the economy to grow and the circular flow model will move faster.

3. Producers discover new sources of energy and other natural resources.

Lower ________ costs mean that businesses can make more profit. More profit is an _________ for them to produce more goods and services. If more goods and services are available, prices may _________ and consumers will purchase more.

resourceincentive

decrease

• An increase in production will cause the economy to grow and the circular flow model will move faster.

4. New laws encourage people to invest in new businesses

Business owners will ______ in new capital goods if they anticipate that they will make more _______. If they anticipate profits, they will ______ more workers and purchase other resources. This creates more ________, people _______ more goods and services, and the economy_______.

investprofitshire

income demand

grows

• An increase in production will cause the economy to grow and the circular flow model will move faster.

5. People have more income and feel good about the future of the economy.

When people are more ________ about the economy and their future income, they feel "wealthier." Feeling this way, they will be more _______ to spend their income on goods and services. If people ______ more goods and services and are willing to pay for them, businesses will ________ more and the economy will grow.

optimistic

willing want

produce

A decrease in production will cause the economy to produce less and the circular flow will move more slowly.

6. Many workers strike and refuse to produce goods and services.

If people earn _____ income, they can not ________ as many goods and services. If the demand for goods and services_________, the economy will slow down and the circular flow will move more______.

less demand

decreasesslowly

• A decrease in production will cause the economy to produce less and the circular flow will move more slowly.

7. Environmental regulations make it more difficult to use land resources.

Regulations make it more ________ for businesses to produce goods and services. This usually ________ the ______ of production and fewer goods and services are produced. If _______ goods and services are produced, less ________ is earned and fewer goods and service are demanded. The economy _______ down.

difficult

increasescost

fewerincome

slows

• A decrease in production will cause the economy to produce less and the circular flow will move more slowly.

8. Interest rates are so high that companies do not invest in new capital

High interest rates make it more _________ to build new factories and buy more machinery. If these costs increase, businesses will _____ expand or they may close down. If this happens, the economy will not grow and the circular flow will slow down.

expensive

not

• A decrease in production will cause the economy to produce less and the circular flow will move more slowly.

9. There is political instability in some regions of the world and business owners people fear that conflicts that will stop trade.

When businesses feel that there is more ______ when trading with other countries, they will not invest in that production. If they do not produce as much for_______, they will not hire as many workers and they will not _____ other resources. This will ______ down the economy and the circular flow.

risk

exportbuy

slow

• A decrease in production will cause the economy to produce less and the circular flow will move more slowly.

10. Many people fear that they might lose their jobs.

If someone feels that they might not have as much income in the future, they will probably _____ buying some goods, such as new cars, appliances and houses. They will purchase _______ services that they might consider to be "luxuries." If this happens, the _________ and the circular flow will slow down.

stop

fewereconomy

The Self-Regulating Nature of the market place

• According to Adam Smith, competition and our own __________ that keep the marketplace functioning.

self-interestself-interest

ADAM SMITH

• A philosopher who in 1776 published, ____________________explains that the economy is made up of countless individual ___________ where each person (buyer and seller) _____ consider their own _______gain; self-interest.

The Wealth of NationsThe Wealth of Nations

transactionstransactions

onlyonlypersonalpersonal

Competition• Consumers in pursuit of their

self-interest, have the ________ to look for ______ prices. An incentive is the _____ of a reward or the _____ of punishment that encourages a person to behave a certain way.

• Adam Smith observed that people respond to both positive and negative incentives.

incentiveincentive lowerlower

hopehope

fearfear

• Economists call the _______ among producers for the dollars of consumers competition.

• While self-interest is the motivating force behind the free market, _________ is the regulating force.

strugglestruggle

competitioncompetition

• Positive and NegativeWhat are the incentives (1 positive and 1 negative) if you are an

elected official,

owner of a small business,

president of a large company or the

director of a local United Way office?

Invisible Hand

• Term coined by Adam Smith that economists use to describe the self-regulating nature of the marketplace. – Ex. The overall result in an economy is that

consumers get the _________ they want at prices that closely reflect the cost of _________ them – all of which occurs without any central plan or direction.

productsproducts

producingproducing

Advantages of the Free Market• Economic efficiency• Economic freedom• Economic growth• Additional goals…including consumer sovereignty

– The power of consumers to decide what gets produced.

What do you plan to do after graduation? Write one paragraph about how your choices are motivated by self-interest. Think about the specifics of your choices…Which college? Where will you travel? What type of job or business? Tell me why you are making these choices and then explain how your self-interest might be affected by competition. (EX: not getting into your 1st choice college)

Circular Flow Model

• In Groups of 2-3 create one real-world example to illustrate the circular flow model of a market economy…ex. Seven Jeans. Place the model on butcher paper. You have 10 minutes and then you will present your model.