Because people act out of their own self-interest, competition develops. Competition regulates markets and gives producers incentive to produce what consumers what.
Markets
Exist so that people can exchange goods and services.
Advantages
Circular Flow Model
1. Product Market
2. Monetary Flow
3. Physical Flow
4. Firm Supplies households
5. Households supply firms
6. Factor market
1. Economic efficiency
2. Economic freedom
3. Economic growth
4. Additional Goals
5. Self Regulating
The Idea
Free Market
What Makes Up A Free Market
Exchanges are voluntary and in their own self-interest. Decisions are made by the individual.
1. Households and Firms: Households own the factors of production (land, labor, capitol). Firms provides goods and services.
2. Factor and product markets:Factor Market- firms purchase factors of production, like renting land, hiring and paying workers and borrowing money-from households. Product Markets- Households buy the goods and services that firms produce.
3. Self-Interest: Factor that pushes people to act
4. Competition: Regulating force
5. Economic freedom and efficiency: Cannot be a true free market society without this factor.