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Benefits of Free Enterprise Chapter 3 Section 1 How does this photo represent the American Free Enterprise system? Basic Principles of Free Enterprise • There are several key characteristics that make up free enterprise. – Profit Motive – Open Opportunity – Legal Equality – Private Property Rights – Free Contract – Voluntary exchange – Competition Features of American Free Enterprise • • • • • • • Profit Motive Open Opportunity Legal Equality Private Property Rights Free Contract Voluntary exchange Competition • As we go through each, give an example of each in your daily life Profit Motive • The drive for the improvement of material well-being. • Making money is the most important aspect of motivation Private Property Rights • The right to control your possessions as you wish. • You may own a and operate a business at any place of your choosing. Open Opportunity • The ability for anyone to compete in the marketplace. • Anyone can enter and leave the market at their own will • One can also make any product they wish Legal Equality • Legal rights to all • All people and companies are protected with the same rights, rules, and regulations Free Contract • The right to decide what agreements in which you want to take part. • You have the sole responsibility to ensure contracts are fair Voluntary Exchange • The right to decide what and when you want to buy and sell a product. • In reality…the consumer controls the economy with their wants and needs • Consumers can decide how to exchange goods and services Competition • The rivalry among sellers to attract consumers. • Business fight each other for consumer dollars….Profit Motive • The key is to show why consumers need to have their product The Consumer’s Role • A fundamental purpose of the free enterprise system is to give consumers the freedom to make their own economic choices. Consumer’s Role • Through their economic dealings with producers, consumers make their desires known. • When buying products, they indicate to producers what to produce and how much to make. Interest Groups • Consumers can also make their desires known by joining interest groups • They are private organizations that try to persuade public officials to vote according to the interests of the groups’ members. – NRA (National Rifle Association) – PETA (Ethical Treatment of Animals) – NEA (Advocate of Educational Professionals) From what aspects of the free enterprise system benefit this person? Government’s Role • Americans expect the government to protect them from potential problems that arise from the production of various products or the products themselves. Which One Would You Feed Your Pet? Which Is Less Expensive? Less Expensive? Product B Product A Worst Dog Food Product A • These dog foods contain the worst dog food ingredients you will find because there is no government regulation • They are comprised mainly of by-products; carcinogenic flavors and preservatives; cheap, unhealthy fillers, and ... Heaven only knows what else! – – – – – – – – Alpo Dog Food Beneful Dog Food Diamond Dog Food Kibbles N’ Bits Dog Food Pedigree Dog Food Purina Pro Plan Dog Food Purina One Dog Food Science Diet Dog Food Best Dog Food Product B • They have an ideal balance of protein, fats, and carbohydrates • No ‘empty calories.’ – – – – – Wellness Dog Food Solid Gold Dog Food Blue Buffalo Dog Food EVO Dog Food Innova Dog Food Public Disclosure Laws • Laws that require companies to provide consumers with important information about their products – such as fuel efficiency of automobiles – side-effects of medication. Public Interest • Both state and federal governments’ involvement in concerns of the public as a whole – environmental protection – sanitary food production. Promoting Growth and Stability Chapter 3 Section 2 Tracking The Business Cycle • The business cycle is a period of a expansion followed by a period of contraction. • This can be explained by using: – Macroeconomics – Microeconomics Macroeconomics • Macroeconomics is the study of the behavior and decision making of entire economies. – Think big picture economics Microeconomics • Microeconomics is the study of the economic behavior and decision making of small units. – Think individual businesses Gross Domestic Product • One measure of a nation’s macroeconomy is gross domestic product (GDP). – GDP is the total value of all final goods and services produced in a particular economy. • GDP will tell us if an economy is healthy or unhealthy Gross Domestic Product • How does the growth of GDP reflect the strengths of the free enterprise system? Government and The Economy • Policymakers pursue three main outcomes as they seek to stabilize the economy. – Employment – Growth – Stability Employment • One aim of federal economic policy is to provide jobs for everyone who is able to work. Growth • The economy must grow to provide additional goods and services. – Each generation of Americans strive to do better than previous ones Stability • Stability gives consumers, producers, and investors CONFIDENCE in the economy and in our financial institutions – promoting economic freedom and growth. Technology and The Economy • The government encourages the development of new technologies in several ways. • Technology is the process used to produce a good or service. Encouraging Innovation • Federal agencies fund many research and development projects. • New technology often evolves out of government research. • A patent gives the inventor of a new product the exclusive right to produce and sell it for 20 years. Providing Public Goods Chapter 3 Section 3 Public Goods • A public good is a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers. • Government provides these goods – Usually from taxpayer dollars Public Sector • Public goods are funded by the public sector – the part of the economy that involves transactions of the government. – Taxes • Some good are: – Defense and law enforcement (including the system of property rights) – public fireworks – Lighthouses – clean air – other environmental goods, and information goods, such as software development, authorship, and invention Free Rider • A free rider is someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it is provided as a public good. Question?? Would the free market ensure that roads are built everywhere they are needed? Answer: It’s doubtful. Neither could individuals afford to pay for a freeway. Mr. Coats is my favorite teacher Market Failure • A market failure is a situation in which the market, on its own, does not distribute resources efficiently. Creation Of A Public Good: STEP 1 Who Will Benefit, Who Will Pay Proposal Farmers want a local river to be dammed Benefit Cost The dam will provide flood protection If an individual farmer were to build the dam, the cost would outweigh his benefits Decision: No All the farmers would benefit from a dam but no single farmer would build it Creation Of A Public Good: STEP 2 A Public Good Is Created Proposal The government considers funding the dam Benefit The dam will provide flood protection Decision: Yes The government will fund the project Cost If the cost is shared among all farmers, the cost to each farmer will be less than the benefit to each farmer Result The benefits of the dam extend to so many people that their shared benefit exceeds the total cost of the dam If the farmers also wanted irrigation ditches built to carry the lake water the their fields, would the ditches be built as a public good? Externalities • An externality is 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. The building of a new dam and creation of a lake generates: • • • • • Positive Externalities A possible source of hydroelectric power Swimming Boating Fishing Lakefront views • • • • Negative Externalities Loss of wildlife habitat due to flooding Disruption of fish migration along the river Overcrowding due to tourism Noise from racing boats and other watercraft What groups of people might feel the greatest impact from the new dam? POSITIVE NEGATIVE Providing A Safety Net Chapter 3 Section 4 The Poverty Problem • The poverty threshold is an income level below that which is needed to support families or households. Is It Possible To Be In Poverty But Still Make Money? Welfare • The poverty threshold is determined by the federal government and is adjusted periodically. • Welfare is a general term that refers to government aid to the poor. Why Are People Upset At The Welfare System? Redistribution Programs • Cash transfers are direct payments of money to eligible people. Cash Transfer Programs Other Programs • In-kind benefits – goods and services provided by the government for free or at greatly reduced prices. • Medical benefits – Health insurance is provided by the government for the elderly and disabled (Medicare) – Health insurance for poor people who are unemployed or are not covered by their employer’s insurance (Medicaid). • Education benefits – Federal, state, and local governments all provide educational opportunities for the poor.