EPF1F. ADAM SMITH & MARKET

ECONOMY

Basic Economic Structures

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What were some of Adam Smith’s economic theories?

Essential question:

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Adam smith believed:

That people, acting in their own self-interest, would work hard and product what consumers want as if directed by an invisible hand

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Smith argued for:

Trade, saying it opened new markets where surplus goods could be sold and allowed for cheaper goods to be imported

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Smith also believed that:

Competition among businesses would keep prices in check

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Smith believed:

There was a limited but important role for govt to do things such as:Enforce contractsGrant patents and copyrightsProvide public works such as roads

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Smith observed:

That specialization and division of labor in a pin factory allowed workers to produce many times more pins than if each worker had been working alone

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What are the characteristics of a market economy, and why is each important?

Essential question:

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Market economies are characterized by:

- private ownership of resources - prices determined in markets - competition among businesses - consumer sovereignty - profit motive - limited government

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Private ownership of resources

Which provides incentives for the owners of resources to weigh the value of present uses against the value of conserving the resources for future use

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Competition among businesses

Tends to lower prices and raise quality

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Prices determined in markets Through the interaction of supply and

demand

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Consumer sovereignty

The concept that consumers’ “dollar votes” tell businesses what to produce

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Profit motive

An incentive for businesses to product what consumers demand and to produce those goods and services efficiently – keeping costs down – in hope of earning greater profit

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Limited government

That acts as a referee protecting:ConsumersWorkersThe environmentAnd competition in the marketplace