THE AMERICAN FREE ENTERPRISE SYSTEM

• IN THIS SECTION YOU MUST BE…– Able to describe the tradition of the Free

enterprise system in the U.S. and the constitutional protections that underlie it.

– Able to explain the basic principles of the U.S. free enterprise system.

– Able to identify the role of the consumer in the U.S. free enterprise system.

– Describe the role of government in the U.S. free enterprise system.

UNDERSTANDING THE FREE ENTERPRISE SYSTEM

• The free enterprise system is an economic system characterized by… (KNOW!!!)– Private or corporate ownership of capital

goods.– Investments that are determined by private

decision rather than by government and determined in a free market.

• Historically America has been considered “the land of opportunity.”

• Why?– The free enterprise system socially and

politically gives people the commitment and flexibility try out their business ideas and to compete in the marketplace.

– Politically the government works together with society to promote the concept of free enterprise. For example…

– Politically the government works together with society to promote the concept of free enterprise. For example the government… (KNOW)

• Protects property rights –– Under the free enterprise system individuals are encouraged to become innovative and expand their ideas and businesses without fear that the government will take over their business or their property.

• Contains rules for taxation – entrepreneurs don’t have to fear being overly taxed by the government thereby suffering undo loss of profits.

• The Constitution guarantees businesses the right to make binding contracts thereby ensuring that they get paid for their products or services.

• Socially, the Basic Principles of free enterprise encourages society to engage in entrepreneurship, competition, and the free market.

• The free enterprise economy has seven key characteristics…– Open opportunity – the concept that everyone

can compete in the market place. • Everyone has the opportunity to make it big or to

lose everything. • A business idea or endeavor does not necessarily

guarantee success, only opportunity.

• The free enterprise economy has seven key characteristics…(KNOW)

– Profit motive – the American economy rests on

a recognition of the importance of profit

motive, the force encourages people and

organizations to improve their material well-

being..

• Business owners make their own choices to operate

in ways they believe will maximize profits. – Government works with society to ensure that businesses

do not take advantage of consumers in order to maximize

profits.

– Legal equality – everyone has the same legal rights to compete in the economic market place.

– Private property rights – the concept that people have the right and privilege to control their possessions as they wish.

– Free contracts - allow people to decide what agreements they want to enter into.

– Voluntary exchange – allows people to decide what and when they want to buy and sell rather than forcing them to buy or sell at particular times and at specific prices.

– Competition – rivalry among sellers to attract consumers while lowering costs.

• Competition provides consumers with a choice of a larger variety of goods, most of which are sold at reasonable prices.

• What is the primary reason that there are many different makes and models of automobile?

• Why are the different makes similar to others?

• Consumer’s Role in free enterprise –– Consumers make their own economic

choices in a free enterprise system.– Consumers make their desires known

through their economic dealings with producers.

– By purchasing products, consumers signal to producers what to make and how much to make.

– Consumers can also make their wishes known by joining an interest group, a private organization that tries to persuade public officials to act or vote according to the interest of the group’s members.

• Consumer’s Role in free enterprise –– Consumers can also make their wishes

known by joining an interest group, a private organization that tries to persuade public officials to act or vote according to the interest of the group’s members.

• How would a group such as “The Committee for Family Values and Decency” try to influence public officials when an entrepreneur tries to open an “Adult Store” in their neighborhood?

• How would a consumer advocate group try to influence public officials in regards to a product such as “lead based paint?”

• Government’s Role in free enterprise –– The government ensures that producers

provide consumers with information about their product.

• Public disclosure laws – require companies to give consumers important information about their products.

– Government agencies regulate industries whose goods and services affect the health, safety, well-being of the public. An example would be...

• Food and Drug Administration• Federal Trade Commission

• Government’s Role in free enterprise –– The government’s role can have a negative

effect on free enterprise.

• Regulations can reduce profits and raise

prices.

• In terms of protecting the health, well-being,

and safety of consumers what are the trade-

offs and opportunity costs of government

regulations?– Would you rather pay more for an airplane ticket or

take a chance on crashing?

– Would you rather pay more for a car or have an

airbag on each side of the car just in case?

• Government’s Role in free enterprise –– The government sets manufacturing

standards that…• Requires drugs to be safe & effective• Supervises sanitary conditions where food is

produced or served.• Labels on equipment about the safe operation

of the equipment or expiration dates of perishables.

PROMOTING GROWTH & STABILITY

• In this section you will…

– Explain how the government tracks and

seeks to influence business cycles.

• A business cycle is a period of economic

expansion followed by a period of contraction.

– Analyze how the government promotes

economic strength.

– Analyze the effect of technology on

productivity

Expansion period

Peak period

Contraction period

BUSINES CYCLE

• Macroeconomics – the study of the behavior and decision making of entire economies.– This branch of economics examines major

trends for the economy as a whole

• Microeconomics – the study of the economic behavior and decision making of small units such as individuals, families, households, & businesses

• Gross Domestic Product (GDP) – the total value of all goods and services produced in an economy– Economists use the GDP and other key

statistics to predict business cycles.

• Promoting economic strength – since the economy is subject to business cycles the government uses public policies to stabilize the economy.– Government polices have three goals

• Promoting economic strength –– Government polices have three goals

(KNOW)• Employment – government seeks to create an

economy that can provide a job for everyone who is able to and wants to work.

• Growth – The economy must grow to provide additional goods & services to an increasing population.

• Stability – stability gives consumers, producers, and investors confidence in the economy and in our financial institutions.

• Promoting economic strength –– Government polices have three goals

(KNOW)• Stability – stability gives consumers,

producers, and investors confidence in the economy and in our financial institutions.

– Stability prevents sudden and drastic shifts in prices.

– Stability promotes confidence in our financial institutions.

• Technology & Productivity – America increases its productivity primarily through two means, technology and work ethic.– Work ethic – a commitment to the value of

work and purposeful activity.• The more purposeful workers are the more

productive the economy becomes.• What can happen to the work ethic in a society

where there is a “Free Rider” problem?

– Technology – The process used to produce goods or services.

• Improvements in technology allow an economy to produce

• Technology & Productivity – America increases its productivity primarily through two means, technology and work ethic.– Technology – The process used to

produce goods or services.• Improvements in technology allow an economy

to produce more output from the same quantity of inputs, or resources.

– Example- The potato to tater tots to hash browns to potato whiskey

PROVIDING PUBLIC GOODS

• A Public Good – is a shared good or service for which it would be impractical to make consumers pay individually and exclude non-payers.– Example - A road or highway would fit this

description.– What would happen to our society if all

schools were privately owned?

• Cost & Benefits of providing public goods.– The benefits to each individual is less than

the cost that each would have to pay if it were provided privately.

– The total benefits to society are greater than the total cost.

– Public goods are financed by the public sector, the part of the economy that involves the transactions of the government.

– The private sector, the part of the economy that involves the transactions of individuals have little incentive to produce public goods.

• Free Rider Problem.- A free rider is someone who choose not to pay for a certain good or service, but would get to benefit from it as if it were provided as a public good.– Example – taxpayer pay for fire protection

yet non- tax payers benefit.– Free riders consume what they do not pay

for.

• Market Failures – a situation in which the market on its own does not distribute resources efficiently. Free riders are an example of a market failure.

• Market Failures – a situation in which the market on its own does not distribute resources efficiently.– In a free market individuals determine what

goods and services get made, how they get made, and who consumes them.

– If a company built roads in a particular area there would be no competition.

– Most companies would only build roads in densely populated areas. That is why economists consider this scenario a market failure.

• Externalities – an economic side effect of a good or service that generates cost or benefit to someone other than the persons deciding how much to produce or consume.– A positive externality generates benefits.

• Refurbishing an old house in the neighborhood and selling it at a high price.

– Benefit – the price of other homes go up to adjust with the sale of the old house.

– A negative externality generates costs to someone other than the producer –

• A drought kills acres of tobacco.– Costs - The price of cigarettes go up