Capitalism and Free Enterprise

Features of Capitalism

• The U.S. economy is built on capitalism and free enterprise.

• Capitalism is an economic system in which private citizens own and use the factors of production to seek a profit.

• Free enterprise is an economy in which competition is allowed to flourish with a minimum of government interference.

Consumer Sovereignty

• Markets are places where different sectors of the economy interact, and their exchanges determine the prices of goods and services.

• Businesses try to produce the products people want most.

• Because of this, we use the term consumer sovereignty to describe the consumer as ruler of the market, the one who determines what products will be produced.

Choice

• Choice is a key element for free enterprise.

• We are free to choose the occupation we want and where we want to work.

• We can choose the products we will buy.

• Businesses can choose the products they will produce and offer for sale.

Consequence

• Along with the freedom to choose comes the responsibility to accept the consequences of the decisions.

• If an entrepreneur starts a business that fails, the government usually won’t help out.

The Right to Own Property

• Under capitalism, we also have private property rights.

• We are free to own and use, or dispose of, our own property as we choose as long as we do not interfere with the rights of others.

• These rights give us the incentive to work, save, and invest.

Competition

• Capitalism thrives on competition—the struggle between buyers and sellers to get the best products at the lowest prices.

• Competition rewards the most efficient producers and forces the least efficient out of business. Competition results in efficient production, higher- quality products, and more satisfied customers.

Profit & Profit Motive

• Profit is the money left over after all costs of production have been paid.

• The profit motive is the driving force behind free enterprise and capitalism. People are willing to invest in a business venture and risk losing their investment for the chance to earn a profit.

Voluntary Exchange

• Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transactions.

• As long as exchanges are voluntary, both buyer and seller must feel that they benefit from their exchange, or they will not do it.

The Spread of Capitalism

• Capitalism developed gradually over hundreds of years.

• Two concepts underlie the market system:– People Can Work for Economic Gain, and– Government Should Have a Very Limited

Role in the Economy

Economist-Adam Smith

• In his book The Wealth of Nations, Scottish economist Adam Smith scientifically described the basic principles of economics for the first time.

• Smith believed that individuals, in seeking profit, end up benefiting society as a whole.

Laissez-Faire

• From the writings of Smith and others came the idea of laissez-faire, meaning “to let alone.”

• According to this philosophy, government should not interfere in the marketplace. Government’s role is to ensure free competition.

• Many American Founders were influenced by Smith’s book.

Other Market Systems-Command Economy

• In a pure command economy, the central government makes the major economic decisions. Individuals have few choices and little influence over the economy. This system has also been called a controlled economy, socialism, or communism.

• Socialism is the belief that the means of production should be owned and controlled by society, either directly or through the government.

• Under communism one class would evolve, property would all be held in common, and there would be no need for government.

Other Market Systems- Mixed Economies

• A mixed economy combines basic elements of a pure market economy and a command economy.

• Most countries have a mixed economy that combines private ownership of property and individual decision making with government intervention and regulations.

Other Market Systems-Traditional Economies

• In traditional economies, economic decisions of what, how, and for whom to produce are based on custom or habit.

• The way of life is passed down from generation to generation.