Market Economy

Explore market economies! Understand consumers, producers, profit, competition, and supply & demand.

Use the following reading as a reference to help you complete the questions. The EconomyYou’ve probably heard people say things like, “The economy is down,” or, “This-or-that would be good for the economy.” Maybe you’ve figured out that the economy has something to do with money. 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 MarketHave 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?It’s All About Supply and DemandWhen 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, anddemand, 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 CostImagine 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 and consumers must make choices that are sometimes very difficult. Make inferences from the reading above to fill in the blanks about the 6 Traits of a Market Economy. 1) Private Property: Owning something gives you the right to buy and sell it. Profit would be impossible without the right to own property. ("Property" here means both tangible items and land.)2) Market Prices: Buyers and sellers freely exchange goods and services on the open market. The market forces of supply and demand determines what prices will be.3) Incentives/ Self-Interest: People's own self-interest motivates them to produce, in the hope of making a profit. Self-interest is also an incentive for consumers, who seek to fulfill their wants and needs at the best price possible.4) Freedom of Choice: People are free to choose what to produce and what to consume. The choices producers and consumers make determines what goods and services are available.5) Competition: Producers compete with each other for profits by trying to produce goods and services that will be most attractive to consumers. This leads to innovation (new ideas) and better prices.6) Limited Government Role: The government does not make rules about what and how much gets produced. The government's main role is to make sure the market is fair and producers have a chance to compete. Read each situation and determine if the price will go up or go down. Prices will go Up! I manufacture the world's best cupcakes! I just heard a storm wiped out a lot of the sugar cane crop. Now there's going to be less sugar to meet everyone's demands! I own an oil refinery. Summer is coming, and people are going to be driving everywhere! They're going to need LOTS of gasoline. I just invented the world's first self-folding chair! It folds itself up and puts itself away. Nobody else makes anything like it! Prices will go Down! I make radios. I just installed a new, hi-tech machine that lets me make twice as many radios for half the price. I sell landscape rocks. I just orders TONS, but a new gardening show has got everyone decorating with gnomes instead. What am I going to do with all these rocks?? Self-folding chairs are so popular, I decided to make some too. I can produce 9,000 self-folding chairs a day and distribute them to all the major stores. Read each scenario, then match the correct term to the example that is describing it. Marla goes to the store and buys a new backpack. Consumer Tyler mows lawns and does yard work for $10 per hour. Producer Gas Station A sells gas for $1.75 Across the street, Gas Station B sells gas for $1.74 Gas Station A lowers its price to $1.74. Competition Liam spends $10 on lemonade mix and ice. On a hot day, he sets up a lemonade stand in his yard. At the end of the day, he has sold $20 worth of lemonade. Profit A car company made thousands of cars this year, but people haven't been buying as many cars. The car dealer lots are all full. Supply and Demand Erin could make $24 this afternoon babysitting, or she could attend her grandma's birthday party. She decides to attend the party. She doesn't get the money, but her grandma is thrilled. Opportunity Cost It's holiday time, and the hottest toy of the year sells out. People are paying ten times what it's worth online. Scarcity.