Section 2 The Free Market
Preview
Objectives
After studying this section you will be able to:
- Explain why markets exist.
- Analyze a circular flow model of a free market economy.
- Understand the self-regulating nature of the marketplace.
- Identify the advantages of a free market economy.
Section Focus
Markets exist so that people can exchange what they have for what they want. A free market is a self-regulating economic system directed by individuals acting in their own self-interest.
Key Terms
- market
- specialization
- household
- firm
- factor market
- profit
- product market
- self-interest
- incentive
- competition
- invisible hand
- consumer sovereignty
What do a farmers' market, a sporting goods store, the New York Stock Exchange, and the sign you posted on your community bulletin board advertising baby-sitting services have in common? All are examples of markets. A market is an arrangement that allows buyers and sellers to exchange things.
Why Markets Exist
Markets exist because no one is self-sufficient. In other words, none of us produces all we require to satisfy our needs and wants. You probably didn't grow the plants to make the fibers to weave the cloth to make the shirt you're wearing. Instead, you purchased your shirt at a store, which is an example of a market. Markets allow us to exchange the things we have for the things we want.
This Thai spice stand, Brazilian stock exchange, and Indian barber shop (left to right) are all examples of markets.
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