6.1: What Are the Principles of a Market Economy?

• I can describe the key features of a market economy.

• I can explain how consumer choices and private businesses influence the economy.

• I can identify how scarcity is solved in a market economy.

Words Matter

Competition - The rivalry between businesses to attract customers.

Consumer -  A person who buys and uses goods and services.

Economic Continuum - A spectrum used to describe where an economy falls between a market economy (right) and a planned economy (left).

Laissez-Faire -  A policy of minimal government interference in the economy; often associated with a market economy

Market Economy - An economic system in which individuals and businesses make most economic decisions, with little to no government involvement.

Planned Economy -  a central authority (a government) creates a central economic plan

Private Ownership - When individuals or businesses, not the government, own and control property or resources.

Producer - A person or business that creates and sells goods and services.

Profit - The money a business makes after paying expenses

Scarcity - The condition of having limited resources to meet unlimited wants and needs.

Supply and Demand - The relationship between how much of something is available (supply) and how much people want it (demand), which affects prices.

Economic Continuum

Why do societies have to create economies?

• Societies cannot have everything they want

• Resources are limited, except for air

• Resources must be shared amongst those in the society

• Individual consumers drive economic decisions by choosing what they want to buy

Principles of a Market Economy

A market economy is an economic system where private individuals and businesses make the most decisions, not the government. 

How much can we produce distribute and consume so that the economy can prosper?

Limited Government Involvement (Right-Wing Idea)

• The government has little or no role in making economic decisions.

• Belief in free enterprise and individual choice.

Consumer Choice Solves Scarcity

• Scarcity means there aren’t enough resources for everyone’s wants.

• In a market economy, what is produced is based on what consumers want to buy — not government decisions.

Private Ownership of Resources

• Individuals or businesses own the land, labour, and capital.

• They choose how to use those resources to produce goods and services.

Profit Motive

• Businesses aim to make a profit.

• If they produce what people want, they succeed.

• If not, they fail. There are no bailouts in a true market economy.

Consumer Sovereignty

• Consumers drive economic decisions by choosing what to buy.

• If no one wants a product, it disappears from the market.

Competition

• Businesses compete for customers.

• Competition leads to better prices, innovation, and improved products.

• No company is supposed to have total control (no monopolies).

Example of how competition can impact consumer decisions:

You start a lemonade stand. No one buys any lemonade because someone else down the street has better-tasting lemonade at a lower price. In a market economy, your business fails — not because the government told you to stop, but because consumers made that decision. 

1. Who owns the resources in a market economy?

2. What causes a business to fail in a market economy?

3. What role does the government play in a market economy?

4. Who decides what products are successful?

Submit when you have completed it.

6.2: Why do Governments Intervene in Market Economy?