Name __________________________
Chapter 2, Section 2: The Free Market
Standard:
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PA 6.1.12.A PA 6.1.12.C PA6.2.12.A
Explain why markets exist.
Analyze a circular flow model of a free market economy.
Understand the self regulating nature of the marketplace.
Identify the advantage of a free market economy.
Objectives:
1. Explain why markets exist
2. Analyze the free market economy
3. Understand the self-regulating nature of the market place
4. Identify the advantage of a free market economy
Markets exist because no one is self-sufficient.
Specialization _______________________________________
_______________________________________________ (makes an economy more
efficient since people can get really good at one thing)

The specific jobs/careers that people do that enable them
_______________ so that they can purchase the other things that
______________________________.
Basic Characteristics of a Market Economy:
Private Property: individuals ____________ NOT government own most of the land.
The right to own private property provides ______________________________of the
property and invest in it. Therefore, it encourages the __________________ of resources
and economic growth.
Free Enterprise: within legal limits business are _________to open and sell the goods
and services of their choice. Individuals are ______________________ and to purchase
the goods and services they ___________with their earnings.
Self Interest: Individuals make economic decisions in their own self interest. This
__________________________________, to get the most for their money and
_____________________.
Competition: Competition keeps prices in line with the cost of production. If a seller
attempts to earn __________ profits
____________________________________________.
System of Markets and Prices: Markets bring together ________ and ________. In the
market system, the forces of ________ and ________, not the _____________, determine
prices.
Limited Government: _______________ government involvement needed to enforce
property rights and to provide _____________ and ______________ such as national
defense that are not provided efficiently by markets.
Consumer sovereignty is the _____________ of the consumers to determine what gets
_____________.
Circular flow diagram shows the interactions between _____________ and _________
(businesses) in the free market.


The circular flow diagram has two exchanges: the __________________ and the
_________________.
Profit: financial gain made in a transaction
According to Adam Smith, _________ (consumers) and __________ (producers)
consider only their ____________ (one’s own personal gain).

Consumers in ________ of their self-interest (motivating force) have the
_____________ to look for lower prices.

Competition (regulating force) causes more competition and the overall result
_______________
__________________________________________.

Invisible-hand describes the _______________ nature of the market place. This
happens when
_____________ and __________ work together.

“the invisible hand of the marketplace”– self-interest
_______________________________________; competition among the
producers causes them to provide these ____________________; with the overall
result being consumers get the products they _______ at _________ closely
reflecting the costs to make them.
Advantages of the Free Market
1. ____________________– producers make what consumers want, and at prices
they are willing to pay
2. Economic Freedom– highest degree of economic freedom of any system
3. _________________– competition encourages innovation so free markets
encourage growth (entrepreneurs are always looking for new profitable
opportunities)

Consumer sovereignty is the power of the consumers to
_____________________________.
o producers are going to make what people will buy so by purchasing only
what they want, consumers ultimately decide what producers make