An economic system is how a nation organizes production and distribution of goods and services. A market economy answers three basic economic questions through individual choice rather than government directives: what to produce based on consumer demand, how to produce using individually owned enterprises, and for whom to produce goods and services that people can afford. A market economy has advantages like variety, lower prices, and acting in self-interest but also disadvantages like unequal distribution and market failures.

1. 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

2. 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

3. • 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
Advantages vs. Disadvantages

4. • Crash Course:
• Capitalism and Socialism-14:00
• https://www.youtube.com/watch?v=B3u4E
FTwprM

5. 1. Private Property
• Creates incentive to work, save, and invest.
• Right to use, sell, abuse, bequeath

6. 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

7. 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

8. 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

9. 5. Profits (Incentives)
• Sellers are free to attempt to maximize their
profits.
• Profit acts as an incentive to work harder.

10. 6. Voluntary Exchange
• When a buyer and seller agree to do
business together, each believes that the
benefits outweigh the costs.

11. 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.

12. 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=ejJRhn53X2
M 6 min.

13. 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

14. 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.