Ch+2.2


 * CH. 2.2 Notes & Questions #1-8**
 * Why Market Exists**
 * A **market** is an arrangement that allows buyers and sellers to exchange things
 * Markets exist because no one is self-sufficient
 * None of us produces all we require to satisfy our needs and wants
 * Specialization**
 * **Specialization** is the concentration of the productive efforts of individuals and firms on a limited number of activities. (Nurse, marine mechanic, baker are all specialties)
 * Specialization leads to efficient use of resources, including capital, land, and labor
 * Buying and Selling**
 * We need markets to sell what we have and to buy what we want
 * Free Market Economy**
 * Economic systems that are based on voluntary exchanges in markets are called free market economies
 * In a free market economy, individuals and businesses use markets to exchange money and products
 * In the free market system, individuals and privately owned businesses own the factors of production, in other words they answer the 3 key economic questions
 * To represent a free market economy one uses a special drawing called a circular flow diagram, which shows how individuals and businesses exchange money and resources
 * Households and Firms**
 * 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
 * Households own the factors of production and are also the consumers of goods and services
 * A **firm** or business is an organization that uses resources to produce a product, which it then sells
 * Firms transform "inputs" or factors of production, into "outputs" or products
 * Factor Market**
 * A **factor market** is when firms purchase or rent land and hire workers paying them wages or salaries for their labor
 * they also borrow money from households to purchase capital, paying households interest or profits in return
 * A **profit** is the financial gain made in a transaction
 * Product Market**
 * In the **product market** households purchase the goods and services that firms produce
 * the money that the households use to pay for the goods and services produced by firms is from the money they received from the firms
 * The Self-Regulating Nature of the Marketplace**
 * The way firms and households cooperate is by competition and our self interest that keep the marketplace functioning
 * Self-Interest**
 * **Self interest** is ones own personal gain, which is the motivating force in the free market
 * Competition**
 * Consumers (households), in pursuit of their self-interest, have the incentive to look for lower prices
 * An **incentive** is the hope of reward or fear of punishment that encourages a person to behave in a certain way
 * **Competition** is when consumers prefer another product over another because of its lower price or higher efficiency
 * The Invisible hand**
 * self-interest and competition work together to regulate the marketplace, self interest spurs consumers to purchase certain goods and services and firms to produce them
 * Overall result is that consumers get the product they want at the prices that closely reflect the cost of producing them, Adam Smith called this the **invisible hand** of the marketplace
 * Advantages of the Free Market**
 * Economic efficiency, economic freedom, economic growth
 * **Consumer Sovereignty** is when consumers in essence decide what gets produced
 * Questions**
 * 1) Specialization makes us more efficient because we have more people who specialize on a product or service
 * 2) In the Factor market, firms buy from the households and the product market is when the households buy from the firms
 * 3) Profit is the financial gain made in a transaction
 * 4) the role of households is to be the consumers and a firm is an organization that uses resources to produce a product
 * 5) Competition benefits consumers by cause prices to get lower
 * 6) Adam Smith meant that all the changes in the market happens without a central plan or direction
 * 7) They both are about what the consumer wants
 * 8) It is hard to achieve because everyone is looking out for themselves and only themselves