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chapter 1 The Free Market System 1 -1 What is a Free Market? 1 chapter 1 The Free Market System 1 -1 What is a Free Market? 1 -2 Principles and Goals of Free Markets 1 -3 Types of Economic Systems © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

chapter 1 1 -1 What is a Free Market? Learning Objectives LO 1 -1 chapter 1 1 -1 What is a Free Market? Learning Objectives LO 1 -1 Explain the importance of free markets to consumers and businesses. LO 1 -2 Identify land, labor, and capital as scarce resources. LO 1 -3 Explain the differences between macroeconomics and microeconomics. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2

chapter 1 1 -1 What is a Free Market? Vocabulary Importance of Free Markets chapter 1 1 -1 What is a Free Market? Vocabulary Importance of Free Markets Scarce Resources and Production Economies: The Study of Scarcity and Choice © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. market free market scarcity resources land labor entrepreneur capital economics macroeconomics microeconomics 3

chapter 1 Importance of Free Markets A market is any place or method used chapter 1 Importance of Free Markets A market is any place or method used by buyers and sellers to exchange goods and services. ü A microeconomic analysis would be to study the market for ostrich eggs. ü Macroeconomics would not consider only the ostrich egg market. It would look only at the total of all goods and services exchanged in an economy. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 4

chapter 1 Importance of Free Markets A free market is the freedom of consumers chapter 1 Importance of Free Markets A free market is the freedom of consumers and businesses to buy and sell products with a minimum of government restrictions. ü Consumers are free to buy or not buy. ü When people pursue their own interests, businesses produces a seemingly limitless creation of goods and services. ü Both consumers and businesses benefit from exchange. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 5

chapter 1 Importance of Free Markets Scarcity is the condition in which human wants chapter 1 Importance of Free Markets Scarcity is the condition in which human wants are forever greater than the available supply of time, goods, and resources. ü There always limits on the economy’s ability to satisfy unlimited wants. ü Scarcity is a fact of life throughout the world. ü Individuals and countries never have all the goods and services that they wish. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 6

chapter 1 Scarce Resources and Production Resources are the basic categories of inputs used chapter 1 Scarce Resources and Production Resources are the basic categories of inputs used to produce goods and services. Resources are also called factors of production. Land is any natural resource provided by nature and used in the production. Labor is the mental and physical capacity of workers to produce goods and services © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 7

chapter 1 Scarce Resources and Production An entrepreneur is a business leader who seeks chapter 1 Scarce Resources and Production An entrepreneur is a business leader who seeks to make profits by combining resources to produce new goods and services. Capital means human-made goods that are used to produce other goods and services. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 8

chapter 1 Economics: The Study of Scarcity and Choice Economics is the study of chapter 1 Economics: The Study of Scarcity and Choice Economics is the study of how society chooses to use its scarce resources for the production of goods and services to satisfy unlimited wants. ü This cause-and-effect chain shows that unlimited wants cause the effect of scarcity. ü Society makes two kinds of choices: ► macro choices ► micro choices © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 9

chapter 1 Economics: The Study of Scarcity and Choice Macroeconomics is the branch of chapter 1 Economics: The Study of Scarcity and Choice Macroeconomics is the branch of economics that studies decision making for the economy as a whole, rather than individual parts. ü It examines nationwide measures, such as unemployment and growth of the economy. ü Macroeconomic decision making considers “big picture” policies. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 10

chapter 1 Economics: The Study of Scarcity and Choice Microeconomics is the branch of chapter 1 Economics: The Study of Scarcity and Choice Microeconomics is the branch of economics that studies decision making by individuals, families, or businesses. ü Examining individual trees, leaves, and pieces of bark, rather than looking at the forest, illustrates microeconomics. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -1 What is a Free Market? 11

chapter 1 1 -2 Principles and Goals of Free Markets Learning Objectives LO 2 chapter 1 1 -2 Principles and Goals of Free Markets Learning Objectives LO 2 -1 Identify the main principles of a free market system. LO 2 -2 Describe the goals of the free market system. LO 2 -3 Explain the three economic questions that all economies must answer. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12

chapter 1 1 -2 Principles and Goals of a Free Market Vocabulary Principles of chapter 1 1 -2 Principles and Goals of a Free Market Vocabulary Principles of Free Markets Economic Goals and Free Markets Three Fundamental Economic Questions © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. private property rights consumer sovereignty voluntary exchange self-interest standard of living What question How question For whom question 13

chapter 1 Principles of Free Markets Private property rights is are the rights of chapter 1 Principles of Free Markets Private property rights is are the rights of individuals and groups to own businesses and resources. ü may be land or factories that an individual, family, or business owns ü includes money, ideas for inventions, and intellectual property ü allows individuals to own the means to borrow money, take risks, invest money, and create personal wealth © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -2 Principles and Goals of Free Markets 14

chapter 1 Principles of Free Markets Consumer sovereignty is the freedom of consumers to chapter 1 Principles of Free Markets Consumer sovereignty is the freedom of consumers to cast their dollar votes to buy, or not to buy, at prices set in competitive markets. ü The consumer is the supreme authority. ü Consumers signal what products businesses should offer for sale. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -2 Principles and Goals of Free Markets 15

chapter 1 Principles of Free Markets Voluntary exchange allows buyers and sellers decide what chapter 1 Principles of Free Markets Voluntary exchange allows buyers and sellers decide what to buy and sell with a minimum of government intervention. Free markets allow everyone to compete in the marketplace. Self-interest is the focus of buyers and sellers on their own personal benefit. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -2 Principles and Goals of Free Markets 16

chapter 1 Economic Goals and Free Markets Standard of living is the level of chapter 1 Economic Goals and Free Markets Standard of living is the level of economic wellbeing of people. ü The economy produces a greater volume of goods and services, which causes the standard of living to rise. ü Economic growth is necessary to provide more jobs and income for people. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -2 Principles and Goals of Free Markets 17

chapter 1 Three Fundamental Economic Questions The What question requires an economy to decide chapter 1 Three Fundamental Economic Questions The What question requires an economy to decide the mix and quantity of goods and services that it will produce. The How question decides about the combination of technology and resources to use for producing goods and services. The For Whom question decides which people receive the goods and services produced. It is concerned with how the economic pie is divided. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -2 Principles and Goals of Free Markets 18

chapter 1 1 -3 Types of Economic Systems Learning Objectives LO 3 -1 Understand chapter 1 1 -3 Types of Economic Systems Learning Objectives LO 3 -1 Understand the basic characteristics of economic systems including traditional, free markets, socialism, and communism. LO 3 -2 Describe how a mixed economy involves different types of systems. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19

chapter 1 1 -3 Types of Economic Systems Vocabulary The Importance of Economic Systems chapter 1 1 -3 Types of Economic Systems Vocabulary The Importance of Economic Systems The Mixed Economy © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. economic system traditional economy market economy invisible hand capitalism command economy socialism communism mixed economy naturalization 20

chapter 1 The Importance of Economic Systems An economic system is the methods used chapter 1 The Importance of Economic Systems An economic system is the methods used to answer the What, How, and For Whom questions. ü The decision-making process involves many aspects of a nation’s culture, such as its laws, form of government, ethics, religions, and customs. ü Economists have established a simple way to classify economic systems into three basic types: ► Traditional ► Market ► Command © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -3 Types of Economic Systems 21

chapter 1 The Importance of Economic Systems A traditional economy answers the What, How, chapter 1 The Importance of Economic Systems A traditional economy answers the What, How, and For Whom questions the way they have been answered for generations. ü People in this type of society learn that copying the previous generation allows them to feel accepted. ü People in such a society believe that what has been good for centuries is still good today. ü the Inuit of Canada, native people of Brazil’s rain forest, and the Amish of Pennsylvania © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -3 Types of Economic Systems 22

chapter 1 The Importance of Economic Systems A market economy does not use customs chapter 1 The Importance of Economic Systems A market economy does not use customs or central planners to answer the three basic economic questions. It answers the What, How, and For Whom questions based only on voluntary buying and selling in markets. An invisible hand is a phrase that means that the best interests of a society are served by markets guided by self-interest. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -3 Types of Economic Systems 23

chapter 1 The Importance of Economic Systems Capitalism is an economic system based on chapter 1 The Importance of Economic Systems Capitalism is an economic system based on private ownership of resources and markets. Capitalism is also called the free market system and best describes the economic system of the United States. In a command economy, the What, How, and For Whom questions are answered by a dictator or central authority. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -3 Types of Economic Systems 24

chapter 1 The Importance of Economic Systems Socialism is an economic system based on chapter 1 The Importance of Economic Systems Socialism is an economic system based on government ownership of resources and centralized decision making. Under socialism, a government owns and controls major industries, such as steel, electricity, and agriculture. Communism is a classless economic system in which all resources are owned by the workers. There is no government and people share production according to their needs. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -3 Types of Economic Systems 25

chapter 1 The Mixed Economy A mixed economy is a system that answers the chapter 1 The Mixed Economy A mixed economy is a system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems. Nationalization is the act of transforming a private enterprise into a government enterprise. Most were temporary. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1 -3 Types of Economic Systems 26