Download 1-02-Free-Enterprise-System

The Economic Process and
The Free Enterprise System
Overview
Students are exposed to basic concepts of the free market system and participate in
activities to reinforce concepts of the economic process.
Objective
Students will be able to:
 Define the role consumers and producers play in the economic process.
 Explain how money flows through the economy.
 Describe the characteristics of a traditional, command, market and mixed
economic system.
 Describe the concepts of the Free Enterprise System.
Preparation
 Review lesson and facilitate activities to demonstrate how the economic process
works. Students have copies of the Circular Flow, Free Enterprise Map and
We Compete! in their Student Workbooks.
 Prepare to display curriculum sheets on the board. Display the Free Enterprise
Examples sheet found at the end of this lesson to facilitate group responses.
 Gather and prepare appropriate materials for the activities.
Discussion: The Economic Process
Ask students to brainstorm and tell you all of the words they associate with the terms
economics and free enterprise. Write their responses on the board.
Define the following terms for students and explain their roles in the economic process.
When appropriate, link your definition to a correct student response to reinforce
understanding of concepts.
Producers: people who combine natural, human and/or capital resources to
make goods or provide services
Consumers: people who buy and use goods and services; also called buyers
Ask students to provide examples of a producer and a consumer and write the
examples on the board under the proper heading, “producer” or “consumer.”
To facilitate the discussion, you might offer the example below:
Newspaper: Provides a service to the community by producing and reporting
news. The news can be in the form of information, entertainment or
analysis. Other businesses in town pay the newspaper to perform
this service.
Customers: Individuals who purchase goods and services in town. A consumer
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might choose to buy a briefcase, which is a good. A customer
might also buy a newspaper, which is a service.
Engage students in a discussion about how producers and consumers generate
income and pay for expenses. Look for comments similar to those listed below:
Producers:
Income (revenue from goods and services)
Expenses (employee salaries, rent, advertising, materials and
supplies, electricity, employee education and training)
Consumers: Income (salaries, interest from savings, dividends from mutual
funds and stocks)
Expenses (rent or mortgage, food, entertainment, clothing,
newspapers and magazines, souvenirs and toys)
Remind students that all things that satisfy people’s needs and wants require resources.
Ask students to name the four resources that they discussed previously. Answer: Land,
labor, capital and entrepreneurship. Suggest that these resources are limited in quality
and quantity. Ask students how the resources converted, transformed, shaped or
molded into goods and services and how do people acquire them? In other words, how
does economic activity take place in a market economy? Discussion: The best
description is the classic economic model “the circular flow of economic activity.”
Ask students to turn to the Circular Flow page in their Student Workbooks. Explain
that the Circular Flow model illustrates economic interaction in the U.S. between
households, business firms and government. There is a circular flow of economic
activity of markets between households and business constantly in motion.
NOTE: If students have not seen the model before, explain that it shows the “big
picture” of how key parts of the macro economy fit together. Households, or consumers,
and government provide businesses with payments in exchange for goods and
services. Business firms and the government make payments to households of workers
and investors, in exchange for labor and other resources. Governments provide public
goods and services to households and businesses in exchange for taxes. Each of the
parts depend on and is influenced by the others.
Discussion: The Free Enterprise System
Suggest to students that they need to understand what the free enterprise system is
because they use it every day to purchase a good or service. The free enterprise
system affects the choices they make about their money. Explain to students that
sometimes the free enterprise system is also called a free market economy or
capitalism.
Review the characteristics of a traditional, command, market and mixed economic
system:
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Traditional economy – Both production and distribution is based on procedures
devised in the distant past and maintained by law, custom or belief.
Command economy – An economy in which economic decisions are made
largely by an authority such as a government-planning agency.
Market economy – An economic system where most goods and services are
exchanged through transactions between households and businesses.
Mixed economy – An economic system that contains elements of traditional,
command and market decision-making.
Explain that in a free enterprise system, transactions between two groups takes place in
a market. A market exists when buyers wishing to exchange money for a good or
service are in contact with sellers wishing to exchange goods or services for money.
Thus, a market is defined in terms of the fundamental forces of supply and demand and
is NOT necessarily confined to any specific geographic location.
Provide students with a definition of free enterprise: Free enterprise is the idea that
people can invest in a business in order to earn a profit. Free enterprise is also the
idea that the best way for the economic process to work is to allow producers to make
their own decisions about what their business will sell and for consumers to decide what
goods and services they will buy without interference from the government. In a free
enterprise system, price in the market is the mechanism by which resources are
allocated.
Activity: Characteristics of the free enterprise system
List the four questions on the board. Divide students into small groups and have them
answer the questions by discussing them among themselves. Ask students to select a
scribe to write down the group’s answers. Allow time for students to discuss the
questions and then ask students to share their answers when you randomly select a
group to respond.
1. What is profit? It is money left over after a business pays all costs, which
include employee salaries, advertising, equipment, supplies, rent, electricity and
maintenance.
2. How does a business get money to invest in the business? The business
can make an offer to allow individuals to buy stock and become shareholders in
the business or can borrow money from a bank and promise to repay the loan
with interest.
3. What risk does a business take in borrowing money to run the business?
The business might not earn enough money to repay the loan, pay shareholders
dividends or earn a profit. Running a successful business requires skill and
tenacity. While there are many successful small businesses in the United States,
60% of all small businesses, often defined as fewer than 500 employees, fail in
the first six years of operation.
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4. What are the benefits of a free enterprise system? There are four benefits:
 Consumers are allowed to make their own choices about the goods and
services they want to buy without interference from the government.
 Consumers have access to quality products because businesses have to
make good products since they are in competition with one another for
consumers and their money.
 Producers benefit from the free enterprise system because they make
products consumers want to buy and earn a profit.
 Consumers benefit because they can buy goods and services at a good
price and have many types of businesses from which to choose.
Ask students how they feel about competition. Is it a good thing or is it a bad thing?
Does anyone benefit from competition? If so, who benefits the most? Explain to
students that one of the most important aspects of the free enterprise system is that it
allows businesses to compete with one another. The definition of competition is when
two or more businesses try to win over a customer to buy their product or
service. Pure competition is a market structure characterized by many buyers and
sellers, firms producing identical products and no barriers to producers to enter and exit.
Suggest to students that there are generally two ways to view competition in the free
enterprise system. The first one is that competition occurs between similar businesses
such as restaurants or newspapers. The second type of competition is different types of
businesses vying for the customer’s dollar. Emphasize to students that at Young
AmeriTowne they will experience both types of competition.
Activity: We Compete
Direct students to complete the We Compete! page in their Student Workbooks to
identify ways businesses compete with one another. Facilitate a discussion about the
importance of price, quantity, and convenience to consumers. Suggest to students that
since businesses in Young AmeriTowne are competing, it might be wise to remember
the three ways to compete.
Direct students to complete the Free Enterprise Map page in their Student
Workbooks to better understand and explain the concepts of free enterprise. Note:
This can be used as a homework assignment.
Activity: Free Enterprise Examples
Finally, to reinforce examples of free enterprise, lead a class discussion using the Free
Enterprise Examples sheet displayed on the board. *
Summary
Ask students to predict what happens to the economic process if a business closes.
For instance, what would happen in Young AmeriTowne if the Snack Shop closed?
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Discussion: Snack Shop employees would be without work and without income to spend
at other businesses. Other businesses that depend on income from the Snack Shop
include the Television Station, Newspaper, Radio, Sign and Print Shop, Parcel Service,
College, Towne Hall, Containers Shop, Technical Services, Warehouse and the Bank.
Have students provide examples of local businesses that have opened or closed in the
"real world" and how it affected the economy.
Explain that students will be both consumers and producers at Young AmeriTowne.
Discuss the importance of spending AmeriDollars to support the economy. What would
happen if employees received a paycheck, but did not spend their money?
Discussion: The economy would slow down. Businesses would not make any money
and would not be able to pay their bank loans.
*Some of the activity handouts for this lesson were created by Enterprise Village, an organization based in
Clearwater, Florida, with the mission of simulating a free market hands-on environment for youth in the
Pinellas County School District.
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