Download American Free Enterprise

American Free Enterprise
Chapter 3
Section 1- Advantages of Free
Enterprise System
U.S. is a capitalist economic
system
 This is all based on private
ownership of the four
factors of production
 Consumers are free to
choose what they buy,
producers are free to make
what they like, and make
as much profit as possible.

How Free Enterprise Works
Free Enterprise is just another name for
capitalism
 You are free to start a business that provides
usefulness to consumers
 Business is free to use scarce resources as
they please
 Managers and workers operate these
businesses in exchange for pay

Consumers decide
what they want to
buy
 They look for
goods and
services to fulfill
wants for the best
possible value

Limits of Free Enterprise
Gov’t only limits free
enterprise in small ways
ex. Can’t take advantage
of consumers with unsafe
products
 Some emerging nations
using free enterprise set
more limits
 Ex. Make companies offer
the same benefits

Five Freedoms of Free Enterprise
1. Right to Private Property- ability to own
your own land, thoughts, and material
items.
 2. Open Opportunity- Anyone can take
part in the market by free choice. Ex. No
one can tell you that you can’t open a deli.
 This creates a wide range of goods and
services to choose from. Forces all
business to be productive and efficient.

3. Legal Equality- Everyone in the
economy is protected by same economic
rights under law. Everyone has the right
to succeed or fail.
 4. Free Contract- People choose which
agreements to enter into in the market
place ex. Buying a house and agreeing
to pay a mortgage

5. Profit Motiveforce that
encourages people
to improve their
wealth through
economic activity
 Ex. You decide to
open a Sheetz on
Route 30 to
become wealthier

Competition in Free Enterprise
Drives prices down to
offset people true
ambitions to make as
much money as they
can
 It creates reasonable
prices for the
consumer, but still
leads to profit
 Ex. Gas Station Wars

Section 2- How Does Free Enterprise
Allocate Resources?
Consumers are looking to get the best
value of a good or service for their buck
 Producers as looking to make as much
profit as possible
 Profit- Money left over after paying for
production costs Revenue-Bills=Profit
 Revenue- Money made from selling a good
or service

By trying to earn profit producers
help to allocate resources
Allocate- to set
aside or locate
scarce resources
 We allocate our
money or set it
aside to fulfill wants
that we feel are
most important.
Gas, Bills, Food

Ex. Seeking Profit
Convenience Stores
 They charge a reasonable
yet higher price on their
products
 By convenience store A
making profit, it will
motivate Timmy to open
his own store
 People allocate resources
to places they know they
will make money

Resources are
now being
allocated (set
aside) for
convenience
stores instead
of another area
 This creates
competition and
variety in the
economy

Consumers Also Allocate Resources
When you buy a product you are choosing
it over another
 This helps to influence what producers will
make and provide

Ex. Popularity of Energy Drinks
Ten years ago they were
not in demand
 Now even the largest
soft drink companies are
making them due to
popularity
 Coke and Pepsi
allocated their resources
and put more money
into making energy
drinks.

Questions
What other trends have taken place in
society where a new product causes
companies to reallocate their resources
into a new product?
 How does a free enterprise system keep
their from being to many conveniences
stores in a market?

Role of Gov’t In Our Economy
Our Gov’t plays a limited role in regulating our
economy
 We call this modified free enterprise
 Refer to Circular Flow Model of Gov’t Interaction
in economy

Federal, State, and Local Gov’t takes tax
dollars from individuals, businesses, and
provides services ex. Military, Social
Security, Prints Money, Maintains Roads
 Product and Factor Markets provide
resources for gov’t to use to operate
 Ex. Gov’t workers, computers, land
 Federal gov’t employs less workers, but
spends way more $ to operate

Section 3- Gov’t and Free Enterprise

Economic
Decisions
are made by
buyers and
sellers, this
is called the
free
enterprise
sector of the
economy
Public and Free Enterprise Sector
Public Sector- delivery and
services by and for the
gov’t ex. Military, Social
Security
 Free Enterprise Sectormakes a good or a service
if all costs and benefits go
to the buyer and seller ex.
Ford Motor Co.

All of the goods and services provided by
the gov’t in public sector are funded by
taxes
 Ex. Street lighting system
 These public goods can’t be taken away
even though you don’t pay directly for
them.

Example

You do not pay a usage fee
for street lights every time
they come on. Yet,
everyone is able to benefit
from them.

Your tax dollars pay for the
lights
Public Sector Example
Military
 Everyone
benefits from
protection
 Your protection
does not take
away from
others
protection

Taxes
They are used to ensure
that one person does not
pay for military services or
other public goods.
 They are used to make sure
all people contribute
towards public goods in
some way
 It would be impossible to
charge individually for all of
these public services

Gov’t collects taxes to
prevent free riders from
taking advantage of
public goods and
services without paying
 Ex. Fireworks Display,
 It would be impossible
to charge everyone who
could see them to pay
for them. So city takes
the money out of tax
dollars

Public and Private Sectors Share
Responsibilities
Private Sector- Businesses looking to make
profit ex. Pat’s Market
 Public Sector- gov’t goods and services
 Ex. Paying a toll on the turnpike
 Highway is built with some federal and
state money
 The rest of the highway we pay for in tolls


Most
infrastructure,
mass transit,
highways, water
and sewer, is
funded by both
the private
sector- citizens
and the public
sector- gov’t
Managing Externalities
Externality- side
effect that affects
someone other than
buyer or seller
 Negative Externalityimposes costs on
people who were
not involved

Examples of negative externalities
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If you play loud music at night your neighbor may not be able to
sleep.
If you produce chemicals and cause pollution as a side effect, then
local fishermen will not be able to catch fish. This loss of income will
be the negative externality.
If you drive a car, it creates air pollution and contributes to
congestion. These are both external costs imposed on other people
who live in the city.
If you build a new road, the external cost is the loss of a beautiful
landscape which people can no longer enjoy.
Social cost
With a negative externality the Social Cost > Private Cost
Positive Externality
This creates benefits for people who were
not involved with economic activity
 Gov’t works to increase these positive
externalities

Examples of Positive Externality
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When you consume education you get a private benefit. But there
are also benefits to the rest of society. E.g you are able to educate
other people and therefore they benefit as a result of your
education.
A farmer who grows apple trees provides a benefit to a beekeeper.
The beekeeper gets a good source of nectar to help make more
honey.
If you walk to work, it will reduce congestion and pollution,
benefiting everyone else in the city.
Social Benefit
With positive externalities the benefit to society is greater than your
personal benefit.
Therefore with a positive externality the Social Benefit > Private
Benefit
Remember Social Benefit = private benefit + external benefit.
Gov’t Subsidies
Gov’t provides money to help cover the
cost of an economic activity that may help
lots of people.
 Ex. Gov’t provides subsidies to open a free
health clinic. It would benefit a whole
community
 What would be another example of a
community benefit through subsidy
money?

Public Transfer Payments
Gov’t also helps the sick, elderly, and poor
in tough times
 Gov’t provides safety net programs to
protect people from economic hardship
 Ex. Welfare, Social Security, Grants

Poverty in America
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The most recent government statistics on
poverty collected show that in 2014,
46.7 million people (15 percent) were in
poverty, including 15.5 million (21 percent)
children under the age of 18.
48.1 million Americans lived in food-insecure
households, including more than 15 million
children.
According to the Feeding America Hunger in
America 2014 study,
Based on annual income, 72 percent of all
Feeding America client households live at or
below 100 percent of the federal poverty line.
The median annual household income of
Feeding America clients is $9,175.
More than half of client households (54
percent) report at least one employed person
at some point in the past year
Some families are poor for along time, but
most move in and out of poverty over the
years
Transfer Payments

Gov’t works to create jobs and helps
through transfer payments- Transfer of
income from one person or group to
another even though the payer receives
nothing in return
Private and Public Transfer Payments
Private Transfer Payments- this could be
help from a family, friend, or charity
 Public Transfer Payment- comes from the
gov’t using tax dollars that you don’t have
to pay back.
 Ex. Welfare, Social Security,
Unemployment
