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GRAPHIC ORGANIZER
Capitalism
BIOGRAPHY
C.J. Walker
VIDEO
Lesson 3
Capitalism and Free Enterprise
ESSENTIAL QUESTION Why and how do people make economic choices?
It Matters Because
Each of us enjoys the freedom to choose a job and decide how to use
our money under the economic system called capitalism.
PHOTO: (tl) John Anthony Rizzo/Getty Images; (tc) Jim McHugh/Corbis Outline; (tr) Michael Ochs Archives/Getty Images
NGSSS covered in
“Capitalism in the United States”
SS.7.E.1.1 Explain how the principles of a
market and mixed economy helped to
develop the United States into a democratic
nation.
SS.7.E.1.3 Review the concepts of supply
and demand, choice, scarcity, and
opportunity cost as they relate to the
development of the mixed market
economy in the United States.
SS.7.E.1.5 Assess how profits, incentives, and
competition motivate individuals,
households, and businesses in a free market
economy.
LA.7.1.6.1 The student will use new
vocabulary that is introduced and taught
directly.
LA.7.1.7.3 The student will determine the
main idea or essential message in
grade-level or higher texts through
inferring, paraphrasing, summarizing, and
identifying relevant details.
Reading HELP DESK
Capitalism in the United States
GUIDING QUESTION What makes capitalism a successful economic system?
The American market economy is huge. It accounts for about
one-fifth of all the economic activity in the world. How did the
United States become such an economic powerhouse?
One answer is in the way in which American citizens go about
satisfying their basic economic wants. We engage in producing,
buying, and selling goods and services in very productive ways.
In the United States, citizens—not the government—make most
of the economic decisions. This kind of economic system is
called capitalism. In capitalism, private citizens own and decide
how to use the factors of production in order to make money.
Our system is also called a free enterprise economy. In a free
enterprise system, individuals and groups have the freedom to
start businesses with little government interference.
Six unique features of the free enterprise system contribute
to the economic health of the United States and some other
countries. These features are (1) economic freedom; (2) markets;
(3) voluntary exchanges; (4) the profit motive; (5) competition;
and (6) private property rights.
Taking Notes: Organizing
As you read the lesson, complete a web diagram
by identifying the features of capitalism. Provide
an example of each. LA.7.1.7.3
Content Vocabulary
Capitalism
• capitalism
• profit
• free enterprise
• profit motive
• voluntary exchange • competition
Lesson 3 493
Small businesses like this one produce
about half of the nonfarm GDP in the
private sector (that is, not including
farming and government spending).
▲
CRITICAL THINKING
Making Connections How do you
think the economy would be affected if
people were not allowed to start their
own businesses?
Reading HELP DESK
Content Vocabulary (cont.)
• private property rights
• laissez-faire economics
494 The American Economy
In the United States, we place a high value
on the freedom to make our own economic
decisions. People are free to buy and sell the
factors of production—land, labor, and capital.
Americans are free to become entrepreneurs
and choose what type of goods or services to
offer. They may also choose where to locate
their business, whom they hire, and how they
want to run the business.
Workers have the freedom to sell their
labor. Americans can decide on what jobs
they will do. In addition, they are free to
save, invest, or spend the money they earn.
Moreover, they can choose how to save their
money, where to invest it, and what goods
and services to buy with it.
The freedoms given to Americans and
their businesses give the United States
economy an important advantage over more
restricted economies. These freedoms allow
the marketplace to adapt quickly to changing
economic conditions. As a result, the economy
is more efficient and productive.
Markets
As you read earlier, buyers and sellers exchange goods and
services for money in markets. Two forces are at work in these
exchanges: demand and supply. Who decides what is supplied
and what is demanded? The buyers and sellers themselves—
individuals and businesses—make these decisions. The
government does not tell producers what to make or consumers
what to purchase. Consumers demand products, and businesses
supply them.
Markets are not perfect. Some types of goods, such as public
defense or a highway system, are not easily bought and sold
in markets. Problems can arise from markets, too. Over time,
though, markets have proven to be the best way to bring buyers
and sellers together. Markets encourage competition, as you will
read soon. But markets have another advantage as well. Markets
also establish prices, and therefore do not need the involvement
of government.
capitalism a system in which private
citizens own most, if not all, of the means of
production and decide how to use them
within legislated limits
free enterprise economic system
in which individuals and businesses are
allowed to compete for profit with a
minimum of government interference
PHOTO: John Anthony Rizzo/Getty Images
Economic Freedom
Why It
Voluntary Exchange
MATTERS
The activity that takes place in the markets is known to
economists as voluntary exchange. Voluntary exchange is
the act of buyers and sellers freely and willingly choosing to
take part in marketplace transactions. These transactions are
the buying and selling of goods and services. The buying and
selling of any factors of production is a transaction as well. In
these exchanges, both the buyer and the seller give something
up—money or a product. Both exchange what they have for
something else that they want—a product or money. When
these exchanges take place voluntarily, or willingly, both the
buyer and the seller benefit. If they did not benefit, the exchange
would not have happened in the first place.
Economic Success
Do you know what it takes to
succeed in today’s economy?
Find out if your school or region
offers a program to learn more
about how free markets work or
how to become an entrepreneur.
You can understand what would make a person want to buy
something in a market. The reason is simple: The consumer
wants that good or service. But why would someone want to
make or supply that product? The equally simple answer is that
he or she wants money.
In a capitalist economy, people risk their savings by
investing in businesses. Investing in a business is risky
because the business might not succeed. On the other hand, if
the business succeeds and grows, investors can earn
great rewards.
People take risks in the hope of making a
profit. Profit is the amount of money left over
from the sale of goods or services after all
the costs of production have been paid. The
profit motive is the desire to earn money
by creating and selling goods and services.
This motive drives the U.S. economy.
It is a major reason why capitalism is a
successful economic system.
The profit motive pushes people to
think of new or improved goods and
services. It leads people to imagine new,
more productive ways of making and
supplying those goods and services. The new
businesses that Americans start help the U.S.
economy grow and prosper.
voluntary exchange the act of
buyers and sellers freely and willingly
engaging in market transactions
profit the money a business receives
for its products or services over and
above its costs
This young woman created a line of nail
polish when she was just a teenager.
Millions of young people throughout the
world learn about entrepreneurship
through education programs such as
Junior Achievement.
▲
PHOTO: Jim McHugh/Corbis Outline
The Profit Motive
CRITICAL THINKING
Finding the Main Idea What role does
entrepreneurship have in a market-based
economy?
profit motive the driving force
that encourages individuals and
organizations to improve their material
well-being
Lesson 3 495
Florida
CONNECTION
Small Businesses
In 1953 the U.S. government
created the Small Business
Administration (SBA). This
federal agency helps people set up
small businesses. Florida has local
SBA offices in Jacksonville and
Miami. The SBA offers people
advice on how to start, finance,
and manage a business. Florida
has more than 1.8 million small
businesses. Small businesses
employ about 46 percent of all
nonfarm, nongovernment
workers in the state.
Competition
Starting a business does not ensure success. Businesses compete
with one another. In fact, capitalism thrives on competition—
the struggle among businesses with similar products to attract
consumers. The most efficient producers sell goods at lower
prices. Lower prices attract buyers. If other producers cannot
improve their productivity or offer a better-quality product, they
might be forced out of business. Competition leads to greater
efficiency, higher-quality products, and more satisfied customers.
Private Property Rights
Under capitalism, people and businesses have private property
rights. This means they have the freedom to own and use their
property as they wish. They can even choose to dispose of, or
get rid of, that property. Private property rights give Americans
the incentive, or drive, to work, save, and invest. That is the
case because we can keep any gains that we earn. Private
property has another important benefit; people tend to take
better care of things they own.
PROGRESS CHECK
Explaining Why do people risk their money to start businesses?
American Entrepreneurs
T
he woman known as C. J. Walker was born Sarah
Breedlove in 1867 to parents who were
emancipated slaves. She was poor and had little
formal education, but she became one of the first
woman millionaires in this country.
With an initial investment of $1.50 in savings,
Walker developed a line of beauty products for black
women. Thousands of Walker saleswomen sold the
popular products door-to-door. Her business earned
$500,000 per year, an income she grew further by
investing in real estate.
C. J. Walker attributed her success to hard work and
a willingness to take chances. “I . . . came from the
cotton fields of the South. From there I was promoted
Reading HELP DESK
competition the struggle that
goes on between buyers and sellers
to get the best products at the lowest
prices
496 The American Economy
SS.7.E.2.4
to the washtub. From there I
was promoted to the cook
kitchen. And from there I
promoted myself into the
business of manufacturing hair
goods and preparations.”
Walker became a well-known
philanthropist in the African American community.
She used her wealth to fund scholarships and to
support artists and writers. She gave to civil rights
organizations, including the NAACP.
Looking at Leadership
How does Walker’s story serve as an example of entrepreneurship?
Identify entrepreneurs from various gender, social, and ethnic backgrounds who started a business seeking to make
a profit.
private property rights the freedom
to own and use our property as we choose as
long as we do not interfere with the rights
of others
Academic Vocabulary
dispose to get rid of; to eliminate
incentive a reward offered to try to persuade
people to take certain economic actions
PHOTO: Michael Ochs Archives/Getty Images
• C. J. Walker, Beauty Products Entrepreneur
The Origins of U.S. Capitalism
GUIDING QUESTION How is the history of capitalism associated with the Founders?
In 1776 Adam Smith, a Scottish philosopher and economist,
published a book titled The Wealth of Nations. The book is still
important today. In fact, Smith is considered to be the father of
modern economics. In his book, Smith argues that the best way
for society to advance is for people to work for their own selfinterest, or their own well-being.
Businesses want to make money. That desire will lead them
to make products that people need and want. People will give
their money to the businesses that supply those needs and
wants. In a similar fashion, people compete to sell their labor
and employers compete to purchase it. The result is an efficient
use of resources and a stable society.
In addition, Smith argued that all of this happens naturally,
“as if by an invisible hand.” In other words, market exchanges
work best with little government interference.
From the writings of Smith and others came the idea of
laissez-faire (leh•say•FEHR) economics. Laissez-faire, a French
term, means “to let alone.” According to this philosophy,
government should not interfere in the marketplace. Instead,
it should limit itself to those actions needed to make sure that
competition is allowed to take place.
When the United States was formed, many of the Founders
were influenced by The Wealth of Nations. James Madison read
it, and Alexander Hamilton borrowed from it in his writings.
Thomas Jefferson wrote, “In political economy [economics], I
think Smith’s Wealth of Nations is the best book.”
PROGRESS CHECK
Explaining What role did Adam Smith believe government should play in
the marketplace?
NGSSS covered in
“The Origins of U.S. Capitalism”
SS.7.E.1.1 Explain how the principles of a
market and a mixed economy helped to
develop the United States into a democratic
nation.
SS.7.E.1.5 Assess how profits, incentives, and
competition motivate individuals,
households, and businesses in a free market
economy.
Why It
MATTERS
Competition in Your Life
Have you ever competed with
other students for placement on a
team, a role in a school
production, or to represent your
school in some other way? Do
you think this competition
resulted in a better team or
production? Explain. SS.7.E.1.5
laissez-faire economics
belief that government should not
interfere in the marketplace
LESSON 3 REVIEW
Vocabulary
1. What are the key features of capitalism and free
enterprise in the U.S. economy? LA.7.1.6.1
2. What are private property rights? How are you
affected by them? LA.7.1.6.1
Answer the Guiding Questions
3. Determining Under capitalism, who decides
what gets produced and who uses the goods and
services? SS.7.E.1.3
4. Drawing Conclusions How did the writings of
Adam Smith influence the economy of the United
States? SS.7.E.1.1
5. PERSUASIVE WRITING Adam Smith said that
people work for their own self-interest. Write a
paragraph describing this idea and whether you
agree with it. Use examples of particular jobs to
support your opinion. SS.7.E.1.5
Lesson 3 497