Entrepreneurial Explorers is all about taking a closer look at how we make choices and decisions to get what we want and need. Many economists research, collect, and analyze data or look at it closely. Then they try to interpret the data or figure out what it means. They look at how people use what they have to get what they want and need and use that information to make future predictions. They analyze the pros and cons of buying and selling different goods and services and they compare and contrast different types of economies around the world.
Scarcity, which means not enough of something, is the core principle behind why people have to make choices. |
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What is a Market Economy?
The United States has a market economy. This is a type of economic system that is based on the interactions of buyers and sellers. Buyers or consumers decide what to consume, or buy in a market economy. Consumer desire for a product is called demand. Consumer demand for a product influences the goods and services businesses make and sell. For example, many people in our country use computers so there is a demand for computers and large amounts are produced. Very few people use typewriters, so the demand is low and the production of just a few typewriters meets that demand. Thus, the interaction of buyers and sellers in the marketplace determine what is produced in a market economy. There are several other important characteristics of a market economy. Let's explore and learn more!
Private Property Rights
In a market economy almost everything is owned by individuals or private businesses, not by the government. Natural resources like minerals and capital resources like machines and factories are not government-owned. Private property rights allow individuals and business to control the productive resources (natural, human, and capital). Private ownership enables people to get and use resources they choose. Private property rights also results in a wide variety of stores and businesses. |
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Voluntary Exchange
Buyers and sellers exchange freely. Buyers use their income to exchange for goods and services provided by sellers. Buyers are free to buy what they want and sellers are free to sell what they want. Both buyers and sellers want to benefit from the exchange. Buyers will get the goods and services they want and sellers want to make a profit. If buyers or sellers do not see a benefit in making an exchange or trade, they are free not to trade. |
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Competition
Sellers have the freedom to produce the products they think will be the most profitable. They also compete to attract buyers. Competition between businesses helps to keep prices low. For example, think about two toy stores selling the same popular toy. To attract buyers, one store may put the toy on sale. The other toy store may decide to lower its price also in order to compete for buyers. |
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Specialization
In a market economy people specialize. People specialize when they produce only some of the goods and service they consume. They then trade with others to get the rest of the things they want. Specialization increases the amount of goods and services people produce and consume. For example, farmers grow crops for food, while doctors help sick people get better. Since they are busy with their jobs, both rely on trade to get what need or want. Another type of specialization happens when a large task is broken down into many separate jobs, like on an assembly line. |
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You are Important in a Market Economy!
Individuals and businesses enjoy economic freedom in a market economy. People can choose what job they want to have (specialization) and their employer. They can choose to have their own business or work for someone else. Businesses are free to choose what goods and services they want to produce. They are also free to sell them anywhere they want. Businesses can also charge whatever price they feel will bring a profit. As a consumer you are very important in a market economy. Every time you buy something, you are helping balance supply and demand. When millions of people do this, the supply of goods adjusts to the demand of the consumers. When you buy things you are also helping to decide what goods and services will be produced. |
QUIZ CHECK
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The circular flow model highlights the flows within the economy; the flow of economic resources, goods/services, and the flow of money.
Let’s follow a few dollars through the cycle.
Imagine you are a hungry consumer. You take your money to a diner for a tasty meal. When you pay your check, you are buying good/services. But the money doesn’t remain in the cash register for long. The diner owner uses the money to purchase resources. These are things like potatoes to make more fries, paying for the people who work for her, or buying a new stove for the diner. These are costs of production. Any extra money is her profit, or the income she earns as an entrepreneur who owns the diner. But the diner owner won’t keep that money in their wallet forever. Soon they will spend it and the cycle begins again.
The circular flow model shows the interaction between two groups of economic decision makers; households and businesses. It also shows the two types of economic markets; the market of resources and the market for goods/services.
Households consist of one or more persons who live in the same housing unit, such as a family. They own all the economic resources in the economy. There are things like land, labor, capital, and entrepreneurial ability. Land resources are actual land or natural resources like oil, water, and trees. Labor resources are the work for which someone is paid for doing. Capital resources are goods used to produce other goods/services like a hammer or a computer. Entrepreneurial ability is the human resource that combines the other resources to produce new goods/services and bring them to market for people to buy.
Businesses are privately owned organizations that produces goods/services and then sells them. They can be large, like an automobile manufacturer, or small, like a diner. They can produce goods, like computers or bicycles, or services, like haircuts and car repairs.
Households and business are connected in the circular flow model and interact in markets.
In the market for resources households sell and businesses buy economic resources (land, labor, capital, and entrepreneurial ability). Businesses pay households wages for their labor, rent for use of their land, interest for use of their capital, and profit for their entrepreneurial ability. Money flows from the businesses to the households and resources flow from the households to the businesses.
In the market for goods / services households buy and businesses sell the goods/services they used the resources to create. Money flows from households to the businesses and goods/services flow from businesses to households.
Let’s follow a few dollars through the cycle.
Imagine you are a hungry consumer. You take your money to a diner for a tasty meal. When you pay your check, you are buying good/services. But the money doesn’t remain in the cash register for long. The diner owner uses the money to purchase resources. These are things like potatoes to make more fries, paying for the people who work for her, or buying a new stove for the diner. These are costs of production. Any extra money is her profit, or the income she earns as an entrepreneur who owns the diner. But the diner owner won’t keep that money in their wallet forever. Soon they will spend it and the cycle begins again.
The circular flow model shows the interaction between two groups of economic decision makers; households and businesses. It also shows the two types of economic markets; the market of resources and the market for goods/services.
Households consist of one or more persons who live in the same housing unit, such as a family. They own all the economic resources in the economy. There are things like land, labor, capital, and entrepreneurial ability. Land resources are actual land or natural resources like oil, water, and trees. Labor resources are the work for which someone is paid for doing. Capital resources are goods used to produce other goods/services like a hammer or a computer. Entrepreneurial ability is the human resource that combines the other resources to produce new goods/services and bring them to market for people to buy.
Businesses are privately owned organizations that produces goods/services and then sells them. They can be large, like an automobile manufacturer, or small, like a diner. They can produce goods, like computers or bicycles, or services, like haircuts and car repairs.
Households and business are connected in the circular flow model and interact in markets.
In the market for resources households sell and businesses buy economic resources (land, labor, capital, and entrepreneurial ability). Businesses pay households wages for their labor, rent for use of their land, interest for use of their capital, and profit for their entrepreneurial ability. Money flows from the businesses to the households and resources flow from the households to the businesses.
In the market for goods / services households buy and businesses sell the goods/services they used the resources to create. Money flows from households to the businesses and goods/services flow from businesses to households.
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