What is an Economic System?

an organized set of procedures a nation

uses in producing and distributing goods
and services

The system is determined by who answers

the 3 basic economic questions
Market Economy

• Based on individual choice, not government

directives.
• Answering the 3 Basic Questions
– What- the goods consumers are willing to buy
are produced.
– How- by individually owned enterprises
– For whom- people who can afford them
Advantages vs. Disadvantages
• Markets are driven by consumer demand
• Most efficient economic system
Advantages
• Act in your own self-interest
• Wide variety of goods/services
• Lower Prices
Disadvantages
• only productive resources rewarded
• market failures (monopolies, public goods, etc.)
• unequal income distribution
• Crash Course:
• Capitalism and Socialism-14:00
• https://www.youtube.com/watch?
v=B3u4EFTwprM
1. Private Property

• Creates incentive to work, save, and invest.

• Right to use, sell, abuse, bequeath

2. Economic Freedom

• You have the ability to create your own

career path. (ex: what job you want, what
school you want to attend, what major you
want, etc.)
– firms not truly free to make what they want; will
only produce what individuals want to purchase
3. Consumer Sovereignty

• The idea that consumers have the ultimate

control over what is produced because they
are free to buy what they want and to reject
what they don’t want.

• Markets respond to consumer demand

4. Competition
• Businesses have to compete for the
consumer’s dollar. (Ex: different channels
on television)

• Results from competition:

– Increases amount of choices
– Increases quality of products
– Lower prices for products
5. Profits (Incentives)

• Sellers are free to attempt to maximize their

profits.

• Profit acts as an incentive to work harder.

6. Voluntary Exchange

• When a buyer and seller agree to do

business together, each believes that the
benefits outweigh the costs.
7. Limited Government
Involvement
• Buyers and sellers must be free to operate
with minimal government intervention.
• All real-world market economies have some
degree of government involvement.
Adam Smith
• Adam Smith is known as the Father of
Economics.
• Wrote Wealth of Nations
– In this publication he argued that a nation
would be wealthier if it engaged in free trade
rather than mercantilism.
https://www.youtube.com/watch?
v=ejJRhn53X2M 6 min.
Characteristics of a Market Economy
(free enterprise)
1. Private Property
2. Economic Freedom
3. Consumer Sovereignty
4. Competition
5. Profit
6. Voluntary Exchange
7. Limited Government Involvement
 Market Economy Activity
• With a partner or by yourself, draw a picture that
represents a characteristic of a Market Economy.
• Your picture must have color and it must be neat.
• Make sure you title your drawing with the
characteristic you have chosen.
• Provide a sentence that explains what it is that you
drew and how it relates to the characteristic you
chose.