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WARM-UP 1. The Internet is considered a Free Market – tell me 5 ways that the internet has changed our economy? Econ Ch 2.2 The Free Market Markets • A market is an arrangement that allows buyers and sellers to exchange _________ things Circular Flow For each example below, predict whether the event should cause the economy to increase or decrease production and consumption of goods and services 1. Workers increase their education and training and become more productive. • An increase in production will cause the economy to grow and the circular flow model will move faster. If people have better or more productive skills, they can produce more goods and services with all of the other resources. If they can ______ resources production costs will more produce _______with the same __________, decrease ___________, businesses will be more willing to increase production, purchase more. If more goods are produced and consumers will _________ grows and consumed, the economy________. 2. Many new technologies and inventions reduce the costs of production • An increase in production will cause the economy to grow and the circular flow model will move faster. easier and _________ cheaper New technologies make it _______ to Lower produce goods and services. ________ costs will be an incentive for businesses to produce more goods and services. If more goods and services are decrease and consumers will available, prices may _________ purchase more. 3. Producers discover new sources of energy and other natural resources. • An increase in production will cause the economy to grow and the circular flow model will move faster. resource costs mean that businesses can make Lower ________ incentive for them to more profit. More profit is an _________ produce more goods and services. If more goods and decrease and services are available, prices may _________ consumers will purchase more. 4. New laws encourage people to invest in new businesses • An increase in production will cause the economy to grow and the circular flow model will move faster. Business owners will invest ______ in new capital goods if profits If they anticipate that they will make more _______. hire they anticipate profits, they will ______ more workers and purchase other resources. This creates more demand more goods and income ________, people _______ services, and the economy_______. grows 5. People have more income and feel good about the future of the economy. • An increase in production will cause the economy to grow and the circular flow model will move faster. optimistic about the economy When people are more ________ and their future income, they feel "wealthier." Feeling willing to spend their this way, they will be more _______ want income on goods and services. If people ______ more goods and services and are willing to pay for produce more and the them, businesses will ________ economy will grow. 6. Many workers strike and refuse to produce goods and services. A decrease in production will cause the economy to produce less and the circular flow will move more slowly. less income, they can not ________ If people earn _____ demand as many goods and services. If the demand for goods decreases the economy will slow down and services_________, slowly and the circular flow will move more______. 7. Environmental regulations make it more difficult to use land resources. • A decrease in production will cause the economy to produce less and the circular flow will move more slowly. difficult for businesses to Regulations make it more ________ produce goods and services. This usually ________ increases the ______ of production and fewer goods and services are cost produced. If _______ goods and services are produced, less fewer income is earned and fewer goods and service are ________ slows down. demanded. The economy _______ 8. Interest rates are so high that companies do not invest in new capital • A decrease in production will cause the economy to produce less and the circular flow will move more slowly. expensive to build new High interest rates make it more _________ factories and buy more machinery. If these costs increase, businesses will _____ not expand or they may close down. If this happens, the economy will not grow and the circular flow will slow down. 9. There is political instability in some regions of the world and business owners people fear that conflicts that will stop trade. • A decrease in production will cause the economy to produce less and the circular flow will move more slowly. When businesses feel that there is more ______ when trading risk with other countries, they will not invest in that production. If they export they will not hire as many do not produce as much for_______, workers and they will not _____ buy other resources. This will ______ slow down the economy and the circular flow. 10. Many people fear that they might lose their jobs. • A decrease in production will cause the economy to produce less and the circular flow will move more slowly. If someone feels that they might not have as much income in stop buying some goods, such the future, they will probably _____ as new cars, appliances and houses. They will purchase fewer services that they might consider to be "luxuries." If _______ economyand the circular flow will slow this happens, the _________ down. The Self-Regulating Nature of the market place • According to Adam Smith, competition and self-interest our own __________ that keep the marketplace functioning. ADAM SMITH • A philosopher who in 1776 published, ___________________ The Wealth of Nations _explains that the economy is made up of countless individual ___________ where transactions each person (buyer and only consider seller) _____ their own _______gain; personal self-interest. Competition • Consumers in pursuit of their self-interest, have the incentive to look for ______ lower ________ prices. An incentive is the _____ hope of a reward or the _____ fear of punishment that encourages a person to behave a certain way. • Adam Smith observed that people respond to both positive and negative incentives. • Economists call the _______ among struggle producers for the dollars of consumers competition. • While self-interest is the motivating force competition behind the free market, _________ is the regulating force. • Positive and Negative What are the incentives (1 positive and 1 negative) if you are an elected official, owner of a small business, president of a large company or the director of a local United Way office? Invisible Hand • Term coined by Adam Smith that economists use to describe the selfregulating nature of the marketplace. – Ex. The overall result in an economy is that products they want at consumers get the _________ prices that closely reflect the cost of producing them – all of which occurs without _________ any central plan or direction. Advantages of the Free Market • • • • Economic efficiency Economic freedom Economic growth Additional goals…including consumer sovereignty – The power of consumers to decide what gets produced. What do you plan to do after graduation? Write one paragraph about how your choices are motivated by self-interest. Think about the specifics of your choices…Which college? Where will you travel? What type of job or business? Tell me why you are making these choices and then explain how your self-interest might be affected by competition. (EX: not getting into your 1st choice college) Circular Flow Model • In Groups of 2-3 create one real-world example to illustrate the circular flow model of a market economy…ex. Seven Jeans. Place the model on butcher paper. You have 10 minutes and then you will present your model.