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Free Market Economy

The document discusses the key aspects of a free market economy, including specialization, incentives, and the roles of households and firms. It explains that in a free market system, individuals and private businesses own the factors of production, make goods and services, and consume what they want. Households provide labor and capital to firms in the factor market, and then purchase goods and services from firms in the product market. A key difference between a planned and free market economy is that supply and demand determine prices in a free market, while the government makes decisions in a planned economy. Most nations adopt a mixed economy model to balance private participation and public welfare needs.

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Jeanne Climaco
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57 views3 pages

Free Market Economy

The document discusses the key aspects of a free market economy, including specialization, incentives, and the roles of households and firms. It explains that in a free market system, individuals and private businesses own the factors of production, make goods and services, and consume what they want. Households provide labor and capital to firms in the factor market, and then purchase goods and services from firms in the product market. A key difference between a planned and free market economy is that supply and demand determine prices in a free market, while the government makes decisions in a planned economy. Most nations adopt a mixed economy model to balance private participation and public welfare needs.

Uploaded by

Jeanne Climaco
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Free Market Economy

Market- an arrangement that allows buyers and sellers to exchange things.

Markets exist because no one is self-sufficient. Each of us produces just one or a


few products

Specialization- the concentration of the productive efforts of individuals and firms


on a limited number of activities.

How can specialization lead to the efficient use of the factors of production
(land labor and capital).

What negative effects can specialization have on society?

3 Incentives

When paying someone to work for you in a specialized field, what risks are
involved?

What are incentives?

Incentive- is the hope of reward or the fear of punishment that encourages a


person to behave in a certain way. People respond predictably to both positive and
negative incentives.

4 Late Pick Up ProblemA study shows that the average day care center has 8 late
pickups per week. This causes the workers at these centers to spend more time
waiting for the children and less time working efficiently. As an economist it is
your job to come up with an incentive scheme that could alleviate this problem!
Explain how your incentives will be implemented.

Explain why they will be effective.

5 Why is it important to understand how incentives motivate people in


different ways?

6 Free Market Economy-In a free market system, individuals and privately


owned businesses own the factors of production, make what they want, and buy
what they want. In other words, individuals answer the three key economic
questions of what to produce, how to produce it and who consumes that which is
produced.

7 Free Market Economy

The players in the free market economy are households and firms.

A household is a person or group of people living in the same residence.

A firm is a business, or an organization that uses resources to produce a product,


which it then sells

8 Factor Market In the Factor Market firms purchase factors of production from
households.

Firms purchase or rent land.

They hire workers

They also borrow money to purchase capital


9 Product MarketGoods and services that firms produce are purchased by
households in the product market

What is the difference between planned economy and free market?

In a theoretical market economy, supply and demand through free competition


should determine prices. ... In a centrally planned economy, the government makes
decisions, instead of consumers and businesses. In reality, there are no pure market
economies

Why do all nation prefer modern mixed economy?

A mixed economy permits private participation in production, which in return


allows healthy competition that can result in profit. It also contributes to public
ownership in manufacturing, which can address social welfare needs.

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