Download Chapter 3: The American Free Enterprise System

Chapter 3: The American Free
Enterprise System
Section 1: Basic Definition
 Free Enterprise System is another name for
capitalism, and economic system based on private
ownership of productive resources. It is “free” in the
sense that anyone has the power to start a business
or enterprise.
The United States as a Free Enterprise
 The free enterprise system is seen in all facets of life
in the United States.
 Over half a million business are started on average
each year in the U.S.
 However with this rapid growth there is always risk
and a similar number of businesses close each year
 The goal is to keep this numbered balanced or in
favor of opening businesses.
Emerging Free Enterprises
 In other countries, the government plays a much
larger role in controlling who may enter into
business.
 This has limited some economies from growing at
the same speed and into the same size as the U.S. but
some would argue has minimized the risk factor.
 Less chance of losing a lot of businesses if the
government approved them…at least this is the
thought.
Key Vocabulary
 Open Opportunity: The ability to enter the
marketplace at his or her own choice.
 Legal Equality: Everyone has the same economic
rights under law.
 Free Contract: Voluntary exchange of work. People
decide what agreements they will enter.
 Profit Motive: The incentive to improve products in
order to improve business.
An Economist: Milton Friedman
 What was Friedman’s outlook on the idea of Free
Markets? What were his beliefs and how might he
respond to the current economic troubles?
Section 2: Allocation of Resources
 Profit and the seeking of profit is the primary
motive and determining factor of how and where
producers allocate resources.
 What are some business examples of this found in
section 2?
Government Involvement
 In reality, we know that the U.S. is a mixed system
that involves government regulation in a free
enterprise system.
 Examine the circular flow model on page 80.
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Resources and products revolve in a circular flow from
households and businesses with resources and capital in
between.
The government is in the middle and interacts with all 4 of
these parts of the circle in the form of products, investment,
and revenue exchange.
Section 3: Role of Government
 In the U.S. the government provides certain goods
and services. This is also known as public goods and
are funded by taxes.
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Ex. Everything from street lights, to maintaining roadways, to
national defense.
An individual who does not contribute to this through taxes is
known as a free rider.
An area of shared responsibility between public and private is
infrastructure. Mutual interest and mutual benefit involved.
Externalities
 An externality is a side effect of a transaction that
effects other not directly involved. These can both be
negative and positive in nature.
Public Transfer Payments
 The government in a free enterprise also is
responsible for creating a safety net for those citizens
who are too old or sick to contribute to the economy.
 A transfer payment is essentially a gift where you are
gaining and not giving up anything at all in
transaction.
 A public transfer payment is the same thing but
involves your tax dollars so in a way you are paying.