Why is the pursuit of profit a critical component of market economies quizlet?

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Private ownership- all businesses are privately owned. the government does not supply health care, education, care for the elderly or any other good or service apart from the provision of law and order and national defence

individual freedom and liberty,- people can choose what job they want to do, firms can sell and consumers can buy whatever they like, provided that the product in question does not physically damage somebody else of their property. People can say whatever they like. The state only has the right to intervene in private affairs if one private party is physically damaging another or their property.

specialisation- free markets are based on voluntary and mutually beneficial exchange that takes places between individuals, firms and even whole countries, who have all chosen to specialise

mutually beneficial, private exchange- households and firms are motivated by self-interest. Therefore, voluntary transactions between buyers and sellers will only take place if they are mutually beneficial. Free market economists believe that value is subjective. these differences in subjective value allow trade to happen.the more mutually beneficial transactions that take place in a free market economy, the higher the level of well-being within society. Transactions between the state and private individuals are based on coercion, not free will therefore, transactions between the state and its citizens do not have to be mutually beneficial.

society is driven by self-interest- firms are motivated by a desire to maximise their profits. consumers also pursue self-interest by using their limited money incomes to buy the combination of goods and services that will maximise their pleasure. Adam Smith believed that society is well-serviced by the pursuit of self-interest, because the best way to maximise profit is to produce something that consumers want to buy.

prices as signals- price changes provide firms with valuable information about shifting consumer tastes and fashions and the type of goods that society should be producing. Consumers create price signals when they spend their incomes. See "how does the free market economy decide what to produce"

laissez-faire- economists who favour the free market believe that good government is small government. The only role for government in a free market economy is to provide law and order to preserve property rights and national defence. This is needed. as if property rights are not upheld there will be a strong incentive for people to steal what they need, rather than working for it. Advocates of Laissez-faire believe that government spending must be kept to a minimum, because it pushes taxes up. High taxes cause two problems:
- the first is that tax reduces our incentive to work
- second, taxation leads to a misallocation of society's scarce resources, because the government, or centralised decision making, will never know our tastes and preferences as well as we do ourselves. The Austrian economist, Ludwig von Mises referred to this as the Socialist Calculation Problem. Politicians who claim to know acht we want better than we do ourselves suffer from what Friedrich von Hayek called a Fatal Conceit. . instead, governments stand aside and allow the output mix of the economy to be determined by the spontaneous order created by the invisible hand of the market. Spontaneous order is what happens when government leave people alone; when entrepreneurs see the desires of consumers and then provide for them

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