Market Economy - StudentDocs

The Market Economy Name:
The Economy
You’ve probably heard people say things like, “The economy is down,” or,
“Such-and-such would be good for the economy.” Maybe you’ve figured out
that the economy has something to do with money. But what is this big, scary
“economy” everyone’s always worried about? And how can you avoid it?
That was a trick question. You can’t avoid the economy! An economy is the
way goods and services are produced and consumed. Everyone is involved in
the economy both by producing goods or services and by consuming them.
Consumers, Producers, and the Market

Have you ever bought anything or paid someone to do something for you?
Then you are a consumer—someone who acquires goods and services
for his or her own personal use. Have you ever worked babysitting,
walking dogs, or making fast-food tacos? Then you are a producer, too—
someone who makes goods or offers services to others. In a market
economy, producers are free to decide what to produce, and consumers
are free to buy whatever they need and want.
The United States has a market economy, which is also called a capitalist
economy. In this type of economy, the government does not tell
producers what to make, and it does not limit (for the most part) what
consumers may buy. This selling and buying takes place in the market,
which is not a physical place, but instead refers to the entire activity of
buying and selling that takes place out in the world.
Are You Motivated Yet?
So, why would anyone decide to produce and sell something? You guessed
it—money! Profit is the financial gain received by selling something for more
than it cost to make it. Producers are motivated by the profits they expect to
gain from the goods or services they offer. Their incentive to produce—the
thing that motivates them—is the idea that consumers will want or need what
they are offering. Thus, someone who thinks people want phones that
respond to voice commands has an incentive to produce such phones because
they expect they will profit from selling them to lots of consumers.
But what about when two or more producers are offering the same goods or
services? This results in competition—producers battling over who can make
the most profit. Competition is a big motivator. Here’s what can happen:
Better Stuff. Competition leads to innovation, which is the process of
developing newer, better things. Think of iPhones, Android phones, and
Windows phones: The producers constantly come out with new versions that
have newer, better capabilities. Why? Because each producer wants you to
spend your money on its phone instead of the other guys’ phones.
Good Deals. Competition drives prices down. For a while, iPad was basically the
only tablet on the market. Apple didn’t have to worry about people buying other
tablets because there weren’t any real choices. But when other tablets came on
the market at prices lower than iPad, Apple began to lower its price in order to
compete. But there’s a limit: Would you sell something for less than it cost to
make?
Reading p.1
It’s All About Supply and Demand

When a market economy is doing well, there is lots of buying and selling.
During a “bad economy,” buying and selling slows down. The cycle of ups
and downs depends mainly on two things: supply, the amount of something
that is available, and demand, the number of consumers who want it.
Supply and demand are called market forces because they act to make the
market function well or poorly.
Supply and Demand Out of Balance

To keep everyone producing, making profits, and buying things, supply and
demand must be balanced. Here’s what can happen if there is high demand but
low supply: Imagine there is a big freeze in Florida and orange trees are
damaged. Fewer oranges are available. If there is still a big demand for
oranges, the price will go up. Fewer oranges also means there aren’t as many
oranges to process. Some people who pick oranges and get them ready to sell
might lose their jobs.
On the other hand, too much supply with low demand can also hurt. Imagine a
coal producer is very busy over the summer and mines tons and tons of coal.
Winter comes, but it doesn’t get very cold. People don’t use their furnaces as
much as usual, so they don’t need as much coal. All of that coal sits around
unused—and they certainly don’t need to mine any more coal. The price of coal
will drop, and some people involved in producing coal could lose their jobs
because there is already too much.
Scarcity and Opportunity Cost

Imagine your class is deciding whether to sell candy or glow sticks for a
fundraiser. Which will earn more money? People like sweets, so you decide to
sell candy. In making that decision, your class gives up whatever benefit it
might have gotten by choosing to sell glow sticks instead. The benefit you give
up by choosing to do one thing instead of another is called opportunity cost.
When you are in the process of making your choice, you try to determine
which choice has more benefits and take a risk that you might be wrong.
The need to choose one thing over another exists because of scarcity—the
limited amount of resources available. Why not sell candy and glow sticks?
Probably because it would cost too much up front to buy both. If there were
unlimited resources, everyone could have everything they want and need, and
there would be no need to make choices. But because of scarcity, producers You can’t always predict the
opportunity cost—but sometimes
and consumers must make choices that are sometimes very difficult. you can!
The Command Economy

The opposite of the market economy is the command economy, where the
government decides what will be produced, how much will be produced, and
how much goods and services will cost. The relationship between supply and
demand does not determine what gets produced and consumed. Instead, the
government makes those decisions. The government owns the equipment for
production, so the government is everyone’s employer. There is no private
property in a pure command economy, so people can’t sell things to make a
profit. People are consumers, but they buy what the government produces.
Reading p.2
_________________
Note-taking Worksheet
Activity Projection Master
A. Review. Read each scenario. Match each label with the example that illustrates it.
B. Motivated? For each example, circle if C. A Circular Flow. There is a circular flow of
the person or business has an incentive to act and interaction between consumers and producers in
circle if they don’t. the market. Draw an arrow at one end of each line
in the circle to show which way the thing described
on that line is flowing.
Worksheet p.1
D. What’s the Opportunity Cost? For each situation, write the opportunity cost—what the person
gave up by making the decision. (Hint: Don’t worry about math. Describe the cost in words.)
E. Three Kinds of Economies. You already know about market and command economies. A traditional
economy exists in primitive cultures where most activity is focused on providing food. People follow the
methods and traditions their ancestors have always used. Think about this, and read the statements below.
Organize them into the comparison chart by writing the letter of each statement where it should go.



____________________
Worksheet p.2

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Market Economy - StudentDocs

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The Market Economy Name:

Consumers, Producers, and the Market

It’s All About Supply and Demand

Supply and Demand Out of Balance

Scarcity and Opportunity Cost

The Command Economy

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