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ECONOMICS STUDY GUIDE, CHAPTER THREE: AMERICAN FREE ENTERPRISE
GEORGIA PERFORMANCE STANDARDS (YOUR OBJECTIVES FOR THIS CHAPTER):
SSEF5 Describe the roles of government in a market economy.
a. Explain why government provides public goods and services, redistributes income, protects property rights, and resolves market
failures.
KEY TERMS
business cycle a period of macroeconomic expansion followed by
a period of contraction
cash transfers direct payments of money to eligible poor people
competition the struggle among producers for the dollars of
consumers; the rivalry among sellers to attract cus-tomers while
lowering costs
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
free contract the concept that people may decide what agreements
they want to enter into
free rider someone who would not choose 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
gross domestic product (GDP) the total value of all final goods
and services produced in a particular economy; the dollar value of all
final goods and services produced within a country’s borders in a
given year
in-kind benefits goods and services provided for free or at greatly
reduced prices
interest group a private organization that tries to persuade public
officials to act or vote according to group members’ interests (p. 54)
legal equality the concept of giving everyone the same legal rights
macroeconomics the study of the behavior and decision making
of entire economies
market failure a situation in which the market does not distribute
resources efficiently
microeconomics the study of the economic behavior and
decision making of small units, such as individuals, families, and
businesses
open opportunity the concept that everyone can compete in the
marketplace
poverty threshold an income level below which income is
insufficient to support families or households
private property rights the concept that people have the right and
privilege to control their own possessions as they wish
private sector the part of the economy that involves the
transactions of individuals and businesses
profit motive the force that encourages people and organizations to
improve their material well-being
public disclosure laws laws requiring companies to provide full
information about their products
public good a shared good or service for which it would be
impractical to make consumers pay individually and to exclude nonpayers
public interest the concerns of the public as a whole
public sector the part of the economy that involves the
transactions of the government
technology the process used to produce a good or service
voluntary exchange the concept that people may decide what and
when they want to buy and sell
welfare government aid to the poor
work ethic a commitment to the value of work and purposeful
activity; system of values that gives central importance to work
MAIN IDEAS AND CONCEPTS
Free Enterprise: The Roles of Consumers, Entrepreneurs and the Government
The fundamental purpose of the free enterprise system is to give consumers the freedom to make their own
economic choices.
Following are seven fundamental elements of American Free Enterprise:
1. economic freedom
3. private property
5. contracts
2. competition
4. voluntary exchange
6. self-interest
7. profit motive
The Two Main Roles of Government in the United States’ Free Enterprise System are to:
1. Provide Economic Stability and 2. Promote Economic Growth.
The U. S. Government’s Three Major Economic Goals are 1. High Employment; 2. Steady Growth; 3. Stable Prices
The government performs these functions by monitoring, regulating and otherwise influencing many components of the economy.
Government provides stability by stabilizing price levels and regulating banks and other financial institutions.
Government promotes growth by encouraging high employment and encouraging research, innovation, and technological development.
Some of the specific ways government works toward these goals are by:
1. Ensuring and enforcing Property Rights, Free Contract, and protecting other business activities
2. Protecting consumers and ensuring adequate information on goods and services is available to them
3. Taxing in order to provide for Public Goods (i.e., goods and services that individuals cannot attain for themselves)
4. Protecting citizens’ health, safety and well-being via legislation, regulation, and federal agencies such as, OSHA EPA, SEC,
FDA, FTC, CPSC, EEOC, etc. (See p. 55; passim)
5. Encouraging innovation and protecting intellectual property by:
a. issuing patents and copyrights, and
b. funding research and development at universities and government institutions
6. Providing a Safety Net: Redistribution and Aid Programs for the Poor, Elderly, Disabled and others (e.g., TANF, Social
Security, Medicare, Medicaid, etc.)
Graphics: Be sure you understand these and can draw them to illustrate their usage:
•
Gross Domestic Product (GDP) Graph (p.58)
•
Unemployment Graph (p.61)
4.
Compare & contrast: Cash Transfers vs. In-kind
Benefits
Name four examples of Cash Transfers and four
examples of In-kind Benefits
SAMPLE SHORT ANSWER QUESTIONS
1.
2.
3.
How does TANF differ from AFDC?
Compare & contrast: Public Sector vs. Private Sector
Compare & contrast: Positive Externality vs. Negative
Externality
SAMPLE ESSAY QUESTIONS
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5.
1.
2.
3.
4.
Explain the difference between a positive externality and a negative externality, and give at least one example of each.
How might the changes brought about by the influence of interest groups affect the public?
What are the main differences between the 1996 Temporary Assistance for Needy Families and the older programs it replaced
such as Aid to Families with Dependent Children?
What interventions or protections have U.S. citizens come to expect from government that are not provided by a free market?
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