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Chapter 3: American Free Enterprise
Section 1
Objectives
1. Define the basic principles of the U.S.
free enterprise system.
2. Describe the role of the consumer in the
American economy.
3. Identify the constitutional protections
that underlie free enterprise.
4. Explain why the government may
intervene in the marketplace.
Chapter 3, Section 1
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Slide 2
Key Terms
• profit motive: the incentive that drives
individuals and business owners
• open opportunity: the principle that
anyone can compete in the marketplace
• legal equality: the principle that everyone
has the same legal rights
• private property rights: the principle that
people have the right to control their
possessions and use them as they wish
Chapter 3, Section 1
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Slide 3
Key Terms, cont.
• free contract: the principle that people
may decide what agreements they want to
enter into
• voluntary exchange: the principle that
people may decide what, when, and how
they want to buy and sell
• interest group: a private organization that
tries to persuade public officials to act in
ways that benefit its members
• patriotism: love of one’s country
Chapter 3, Section 1
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Slide 4
Key Terms, cont.
• eminent domain: the right of a
government to take private property for
public use
• public interest: the concerns of society
as a whole
• public discourse laws: laws requiring
companies to provide information about
their products or services
Chapter 3, Section 1
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Slide 5
Introduction
• What are the benefits of free enterprise?
– Free enterprise makes it possible for people
who have ideas and persistence to start
businesses and make themselves successful.
– Free enterprise also offers a great deal of
economic freedom to the consumer.
Chapter 3, Section 1
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Slide 6
What is Free Enterprise?
• The United States is considered by many to be a
“land of opportunity.”
• The American tradition
of free enterprise has
been a key factor in
supporting this belief.
Chapter 3, Section 1
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Slide 7
Principles of Free Enterprise
• Characteristics of a free enterprise include:
– Profit motive
• The American economy rests on recognition of
the profit motive as a key incentive. In a free
enterprise businesspeople make decisions
based on what will increase their profits.
– Open opportunity
• The American principle of open opportunity
says that anyone can compete in the
marketplace.
Chapter 3, Section 1
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Slide 8
Principles, cont.
• Checkpoint: What are three key economic rights
that Americans enjoy?
– Legal equity
• American free enterprise believes in the principle that
everyone has the same legal rights.
– Private property
• The free enterprise system allows people to make their
own decisions about their own property.
– Freedom to buy and sell
• People can decide what agreements to enter into, as
well as what, when, and how they want to buy and sell.
Chapter 3, Section 1
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Slide 9
The Role of the Consumer
• Checkpoint: What role do consumers play in a
free enterprise system?
– In the free enterprise system consumers have the
freedom to make their own economic choices.
Through voluntary exchange, consumers send a
signal to businesses, telling them what to produce
and how much to make.
– Consumers can also make their wishes known to
businesses by joining interest groups, which influence
public officials to act in ways that benefit its members.
Chapter 3, Section 1
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Slide 10
The Constitution
• Free enterprise in the United States is
written into the framework of the U.S.
Constitution.
– One right granted by the Constitution is the
5th Amendment, which protects private
property from being taken from a citizen
without due process.
– However, the government is allowed to take
property from an individual, paying fair market
value for that property, when there is a public
reason. This is known as eminent domain.
Chapter 3, Section 1
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Slide 12
The Constitution, cont.
• The Constitution also spells out how
government can tax individuals and
businesses.
– According to Article 1, Congress could levy
taxes but not until the passage of the
Sixteenth Amendment in 1913 Congress
could levy an income tax on individuals and
businesses.
• Finally, the Constitution guarantees people
and businesses the right to make
contracts.
Chapter 3, Section 1
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Slide 13
The Role of Government
• The government plays many roles in the
marketplace.
• These roles include:
– Carrying out the constitutional responsibilities
to protect property rights, contracts, and other
business activities
– Making sure that producers provide
consumers with information
– Protecting the health, safety, and well-being
of consumers.
Chapter 3, Section 1
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Slide 14
Major Federal Regulatory Agencies
• All of the agencies to
the right represent
ways the federal
government
intervenes in the
marketplace.
– Identify one agency
meant to protect each
of the following:
(a) public safety,
(b) fair competition,
(c) equality.
Chapter 3, Section 1
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Slide 15
Negative Effects of Regulation
• Negative effects of
government regulation
include:
– Rules are costly to
implement
– Regulations stifle
competition
– Increased government
spending in industries
because the government
has to hire workers to do
the actual oversight
Chapter 3, Section 1
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Slide 16
Chapter 3: American Free Enterprise
Section 2
Objectives
1. Explain why the government tracks and
seeks to influence business cycles.
2. Describe how the government promotes
economic strength.
3. Analyze the factors that increase
productivity.
Chapter 3, Section 2
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Slide 2
Key Terms
• macroeconomics: the study of economic
behavior and decision-making in a nation’s
economy
• microeconomics: the study of the economic
behavior and decision-making in small units,
such as households and firms
• gross domestic product: the total value of all
final goods and services produced in a country
in a given year
• business cycle: a period of macroeconomic
expansion, or growth, followed by one of
contraction, or decline
Chapter 3, Section 2
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Slide 3
Key Terms, cont.
• referendum: a proposed law submitted directly to
the public
• obsolescence: situation in which older products
and processes become out-of-date
• patent: a government license that gives the inventor
of a new product the exclusive right to produce and
sell it
• copyright: a government license that grants an
author exclusive rights to publish and sell creative
works
• work ethic: a commitment to the value of work
Chapter 3, Section 2
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Slide 4
Introduction
• How does the U.S. government encourage
growth and stability?
– The U.S. government encourages growth and
stability by:
•
•
•
•
•
Chapter 3, Section 2
Tracking business cycles
Promoting a high employment rate
Keeping prices stable
Encouraging the development of new technologies
Taking pride in the American work ethic
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Slide 5
Tracking Business Cycles
• Even under the free
enterprise system, the
government
intervenes to
influence
macroeconomic
trends.
• One measure of the
nation’s economic
well-being is gross
domestic product
(GDP).
Chapter 3, Section 2
How much did the GDP grow
between 1910 and 2010?
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Slide 6
GDP and the Business Cycle
• During a period of growth, GDP goes up
and in a period of contraction, GDP goes
down.
• This pattern of a period of expansion
followed by a period of contraction is
called a business cycle.
– Changes in the business cycle take place
because individuals and businesses, acting in
their own self-interest, make decisions about
factors such as prices, production, and
consumption.
Chapter 3, Section 2
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Slide 7
Promoting Economic Strength
• Checkpoint: What three goals does the
government try to meet when promoting
economic strength?
– High employment
– Economic growth
– Stability and security
Chapter 3, Section 2
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Slide 8
Employment and Growth
• Employment
– The government strives to make sure there
are enough jobs for everyone who is able
to work.
– An unemployment rate between 4 percent
and 6 percent is considered healthy.
• Economic Growth
– To help spur economic growth, the
government can cut taxes or increase
spending.
Chapter 3, Section 2
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Slide 9
Stability and Security
• Stability and Security
– One indicator of economic stability is the
general level of prices.
– The government seeks to prevent sudden,
drastic shifts in prices so that neither the
consumer nor the producer suffers.
– Other indicators of stability are financial
institutions such as banks and the stock
market. Government regulations seek to keep
these institutions as stable as possible.
Chapter 3, Section 2
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Slide 10
Economic Citizenship
• Voters have a say in promoting economic
strength by:
– Voting for public officials
– Voting on referendum
Chapter 3, Section 2
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Slide 11
Technological Progress
• Checkpoint: How
does improved
technology help the
economy?
– Technological
progress has enabled
the U.S. economy to
operate more
efficiently.
Chapter 3, Section 2
T
These
college entrepreneurs,
Gavin McIntyre and Eben Bayer,
created a new “green” insulation
partly from mushrooms they grew
under their beds.
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Slide 12
Technological Progress, cont.
• Many inventions have improved
productivity in the United States, including:
– The light bulb, which made a longer
workday possible
– The assembly line, which led to mass
production at affordable costs
Chapter 3, Section 2
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Slide 13
The Government’s Role
• The government promotes innovation and
invention to help maintain the country’s
technological advantage by:
– Funding research and development projects
at universities
– Establishing their own research institutions,
like NASA
– Granting patents and copyrights, which are an
incentive to innovation
Chapter 3, Section 2
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Slide 14
The American Work Ethic
• Economic growth cannot occur without
individual effort.
– Americans pride themselves on their strong
work ethic, which has them not only working
hard but caring about the work that they do.
– The American work ethic has long been seen
as a key ingredient in the nation’s productivity
and economic success.
Chapter 3, Section 2
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Slide 15
Chapter 3: American Free Enterprise
Section 3
Chapter 3, Section 3
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Slide 1
Objectives
1. Identify examples of public goods.
2. Analyze market failures.
3. Evaluate how the government allocates
some resources by managing
externalities.
Chapter 3, Section 3
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Slide 2
Key Terms
• public good: a shared good or service for
which it would be inefficient or impractical to
make consumers pay individually and to
exclude those who did not pay
• public sector: the part of the economy that
involves the transactions of the government
• private sector: the part of the economy that
involves the transactions of individuals and
businesses
• infrastructure: the basic facilities that are
necessary for a society to function or grow
Chapter 3, Section 3
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Slide 3
Key Terms, cont.
• free rider: someone who would not be willing to
pay for a certain good or service but who would
get the benefits of it anyway if it were provided
as a public good
• market failure: a situation in which the free
market, operating on its own, does not distribute
resources efficiently
• externality: an economic side effect of a good
or service that generates benefits or costs to
someone other than the person deciding how
much to produce or consume
Chapter 3, Section 3
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Slide 4
Introduction
• Why does a society provide public goods?
– The government provides society with certain
public goods because it would be inefficient or
impractical for a free market economy to
provide these goods on its own.
Chapter 3, Section 3
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Slide 5
Public Goods
• A public good is a shared good or service
for which it would be inefficient or
impractical to make consumers pay
individually and to exclude those who do
not pay.
Chapter 3, Section 3
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Slide 6
Public Goods, cont.
• In the case of most
public goods it is
simply not practical
for a private business
to provide the service,
charge those who
benefit, and exclude
nonpayers from using
the source.
Maintaining street signs and
traffic lights is one economic
role of government.
Chapter 3, Section 3
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Slide 7
Public Goods, cont.
• Public goods can be used by any number of
consumers without reducing the benefits to any
single consumer.
• Public goods are
financed by the
public sector.
– Firefighters are an
example of a public
good.
Chapter 3, Section 3
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Slide 8
Costs and Benefits
• Checkpoint: What two criteria must be present
for a public good?
– The benefit to each
individual is less than
the cost that each
individual would have to
pay if it were provided
privately.
– The total benefits to
society are greater
than the total cost.
Chapter 3, Section 3
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Slide 9
Costs and Benefits, cont.
• The government pays for public goods
through taxes.
• Thus, the financial burden on each
individual is significantly less than if a few
people decided to fund a project privately.
Chapter 3, Section 3
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Slide 10
Free Riders
• One issue associated with public goods is
known as the “free-rider problem.”
• Free riders are people who are not willing
to pay for a particular good or service but
would benefit from it if it were offered as a
public good.
– The free-rider problem suggests what would
happen if the government stopped providing
public goods: People would refuse to pay and
many services would be eliminated.
Chapter 3, Section 3
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Slide 11
Market Failures
• Checkpoint: Why are public goods an
example of a market failure?
– Public goods are examples of a market
failure, where the free market does not
distribute resources efficiently.
• For example, the free market would not be able to
build roads efficiently because building roads does
not meet the criteria for a properly functioning
market system. Thus, road construction is a
market failure.
Chapter 3, Section 3
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Slide 12
Positive Externalities
• Public goods involve externalities, which
may be either positive or negative.
• Positive Externalities
– Represent the beneficial side effects of public
goods.
– Can also be generated by the private sector.
– Allow someone who did not purchase a good
to enjoy part of the benefits of that good.
Chapter 3, Section 3
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Slide 13
Negative Externalities
• Negative externalities cause part of the cost of
producing a good or service to be paid for by
someone other than the producer.
Why would increased car traffic be considered a positive externality
by some people and a negative externality by others?
Chapter 3, Section 3
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Slide 14
Government’s Goals
• Understanding externalities helps us see
more roles that the government plays in
the U.S. economy.
– The government may take action to create
positive externalities, such as improving
education.
– The government aims to limit negative
externalities like pollution.
Chapter 3, Section 3
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Slide 15
Government’s Goals, cont.
• Many economists feel
that the private sector
produces more
positive externalities
that the government
does.
– This belief shows itself
in the debate over how
to stop pollution to the
environment.
Chapter 3, Section 3
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Slide 16
Chapter 3: American Free Enterprise
Section 4
Objectives
1. Explain the U.S. political debate on
ways to fight poverty.
2. Identify the main programs through
which the government redistributes
income.
3. Describe how the government
encourages private efforts to help the
needy.
Chapter 3, Section 4
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Slide 2
Key Terms
• poverty threshold: an income level below that
which is needed to support families and
households
• welfare: government aid to the poor
• cash transfers: direct payment of money by the
government to the poor, disabled, or retired
people
• in-kind benefits: goods and services provided
for free or greatly reduced prices
• grant: a financial award given by a government
agency to a private individual or group in order
to carry out a specific task
Chapter 3, Section 4
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Slide 3
Introduction
• How does government help the poor?
– To help the poor, government programs take
money from some people and redistribute it to
others.
– Such programs include:
•
•
•
•
•
Chapter 3, Section 4
The welfare system
Cash transfers
In-kind benefits
Medical and educational benefits
Grant money
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Slide 4
The Poverty Problem
• In a free market, the wealth is spread unevenly
throughout society, which leaves some people below the
poverty threshold.
• The U.S. Bureau of the Census sets the poverty
threshold based on the cost of the goods a family needs
to buy.
Chapter 3, Section 4
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Slide 5
The Government’s Role
• Checkpoint: What is the goal of the
government welfare program?
– The government provides a safety net to
groups like the very young, the very old, the
sick, the poor, and the disabled through
various federal, state, and local government
programs.
Chapter 3, Section 4
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Slide 6
The Government’s Role, cont.
• One government
program, the welfare
program, collects
funds from taxpayers
and redistributes this
money to those in
need.
– This system began
during the Great
Depression and
continues today.
Chapter 3, Section 4
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Slide 7
Welfare Reform
• Critics of welfare claim that it discourages
productivity and further aggravates
poverty.
– In 1996, new welfare reforms limited the
amount of time people could receive welfare
payments and gave states more freedom to
experiment with antipoverty programs.
Chapter 3, Section 4
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Slide 8
Redistribution Programs
• Government redistribution programs include the
following:
– Cash transfer programs
• Temporary Assistance for Needy Families
(TANF) - sends welfare payments directly to the states,
which design and run their own welfare programs
Chapter 3, Section 4
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Slide 9
Redistribution Programs, cont.
• Social Security - collects money from current
workers and redistributes funds to retired and
disabled persons
Chapter 3, Section 4
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Slide 10
Redistribution Programs, cont.
• Unemployment Insurance
– Provides money to workers who have lost
their jobs as long as recipients offer proof that
they have made efforts to get work.
– This help is only temporary, offering benefits
for only 26 weeks in most states.
• Worker’s Compensation
– Provides state funds to workers injured on
the job.
Chapter 3, Section 4
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Slide 11
In-Kind Benefits
• The government also provides poor people
with in-kind benefits, such as:
– Food stamps
• Qualified people
receive assistance
with their monthly
food purchases
Chapter 3, Section 4
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Slide 12
In-Kind Benefits, cont.
• Subsidized housing
– Qualified people are allowed to rent housing
for less than the regular rent
• Legal aid
– Qualified people receive legal advice at no
charge
Chapter 3, Section 4
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Slide 13
Medical and Educational Benefits
• The government
provides health care
to the elderly
(Medicare), the
disabled, the poor
(Medicaid), and
children who are
uninsured (SCHIP).
• The government also
funds educational
programs from
preschool to college.
Chapter 3, Section 4
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Slide 14
Encouraging Private Action
• Checkpoint: How does tax law provide an
incentive to help the needy?
– Federal tax laws allow both individuals and
corporations to take tax deductions for
charitable donations.
– The government may also provide grants and
other assistance to organizations that provide
social services.
Chapter 3, Section 4
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Slide 15