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netw rks There’s More Online! GRAPHIC ORGANIZER Capitalism BIOGRAPHY C.J. Walker VIDEO Lesson 3 Capitalism and Free Enterprise ESSENTIAL QUESTION Why and how do people make economic choices? It Matters Because Each of us enjoys the freedom to choose a job and decide how to use our money under the economic system called capitalism. PHOTO: (tl) John Anthony Rizzo/Getty Images; (tc) Jim McHugh/Corbis Outline; (tr) Michael Ochs Archives/Getty Images NGSSS covered in “Capitalism in the United States” SS.7.E.1.1 Explain how the principles of a market and mixed economy helped to develop the United States into a democratic nation. SS.7.E.1.3 Review the concepts of supply and demand, choice, scarcity, and opportunity cost as they relate to the development of the mixed market economy in the United States. SS.7.E.1.5 Assess how profits, incentives, and competition motivate individuals, households, and businesses in a free market economy. LA.7.1.6.1 The student will use new vocabulary that is introduced and taught directly. LA.7.1.7.3 The student will determine the main idea or essential message in grade-level or higher texts through inferring, paraphrasing, summarizing, and identifying relevant details. Reading HELP DESK Capitalism in the United States GUIDING QUESTION What makes capitalism a successful economic system? The American market economy is huge. It accounts for about one-fifth of all the economic activity in the world. How did the United States become such an economic powerhouse? One answer is in the way in which American citizens go about satisfying their basic economic wants. We engage in producing, buying, and selling goods and services in very productive ways. In the United States, citizens—not the government—make most of the economic decisions. This kind of economic system is called capitalism. In capitalism, private citizens own and decide how to use the factors of production in order to make money. Our system is also called a free enterprise economy. In a free enterprise system, individuals and groups have the freedom to start businesses with little government interference. Six unique features of the free enterprise system contribute to the economic health of the United States and some other countries. These features are (1) economic freedom; (2) markets; (3) voluntary exchanges; (4) the profit motive; (5) competition; and (6) private property rights. Taking Notes: Organizing As you read the lesson, complete a web diagram by identifying the features of capitalism. Provide an example of each. LA.7.1.7.3 Content Vocabulary Capitalism • capitalism • profit • free enterprise • profit motive • voluntary exchange • competition Lesson 3 493 Small businesses like this one produce about half of the nonfarm GDP in the private sector (that is, not including farming and government spending). ▲ CRITICAL THINKING Making Connections How do you think the economy would be affected if people were not allowed to start their own businesses? Reading HELP DESK Content Vocabulary (cont.) • private property rights • laissez-faire economics 494 The American Economy In the United States, we place a high value on the freedom to make our own economic decisions. People are free to buy and sell the factors of production—land, labor, and capital. Americans are free to become entrepreneurs and choose what type of goods or services to offer. They may also choose where to locate their business, whom they hire, and how they want to run the business. Workers have the freedom to sell their labor. Americans can decide on what jobs they will do. In addition, they are free to save, invest, or spend the money they earn. Moreover, they can choose how to save their money, where to invest it, and what goods and services to buy with it. The freedoms given to Americans and their businesses give the United States economy an important advantage over more restricted economies. These freedoms allow the marketplace to adapt quickly to changing economic conditions. As a result, the economy is more efficient and productive. Markets As you read earlier, buyers and sellers exchange goods and services for money in markets. Two forces are at work in these exchanges: demand and supply. Who decides what is supplied and what is demanded? The buyers and sellers themselves— individuals and businesses—make these decisions. The government does not tell producers what to make or consumers what to purchase. Consumers demand products, and businesses supply them. Markets are not perfect. Some types of goods, such as public defense or a highway system, are not easily bought and sold in markets. Problems can arise from markets, too. Over time, though, markets have proven to be the best way to bring buyers and sellers together. Markets encourage competition, as you will read soon. But markets have another advantage as well. Markets also establish prices, and therefore do not need the involvement of government. capitalism a system in which private citizens own most, if not all, of the means of production and decide how to use them within legislated limits free enterprise economic system in which individuals and businesses are allowed to compete for profit with a minimum of government interference PHOTO: John Anthony Rizzo/Getty Images Economic Freedom Why It Voluntary Exchange MATTERS The activity that takes place in the markets is known to economists as voluntary exchange. Voluntary exchange is the act of buyers and sellers freely and willingly choosing to take part in marketplace transactions. These transactions are the buying and selling of goods and services. The buying and selling of any factors of production is a transaction as well. In these exchanges, both the buyer and the seller give something up—money or a product. Both exchange what they have for something else that they want—a product or money. When these exchanges take place voluntarily, or willingly, both the buyer and the seller benefit. If they did not benefit, the exchange would not have happened in the first place. Economic Success Do you know what it takes to succeed in today’s economy? Find out if your school or region offers a program to learn more about how free markets work or how to become an entrepreneur. You can understand what would make a person want to buy something in a market. The reason is simple: The consumer wants that good or service. But why would someone want to make or supply that product? The equally simple answer is that he or she wants money. In a capitalist economy, people risk their savings by investing in businesses. Investing in a business is risky because the business might not succeed. On the other hand, if the business succeeds and grows, investors can earn great rewards. People take risks in the hope of making a profit. Profit is the amount of money left over from the sale of goods or services after all the costs of production have been paid. The profit motive is the desire to earn money by creating and selling goods and services. This motive drives the U.S. economy. It is a major reason why capitalism is a successful economic system. The profit motive pushes people to think of new or improved goods and services. It leads people to imagine new, more productive ways of making and supplying those goods and services. The new businesses that Americans start help the U.S. economy grow and prosper. voluntary exchange the act of buyers and sellers freely and willingly engaging in market transactions profit the money a business receives for its products or services over and above its costs This young woman created a line of nail polish when she was just a teenager. Millions of young people throughout the world learn about entrepreneurship through education programs such as Junior Achievement. ▲ PHOTO: Jim McHugh/Corbis Outline The Profit Motive CRITICAL THINKING Finding the Main Idea What role does entrepreneurship have in a market-based economy? profit motive the driving force that encourages individuals and organizations to improve their material well-being Lesson 3 495 Florida CONNECTION Small Businesses In 1953 the U.S. government created the Small Business Administration (SBA). This federal agency helps people set up small businesses. Florida has local SBA offices in Jacksonville and Miami. The SBA offers people advice on how to start, finance, and manage a business. Florida has more than 1.8 million small businesses. Small businesses employ about 46 percent of all nonfarm, nongovernment workers in the state. Competition Starting a business does not ensure success. Businesses compete with one another. In fact, capitalism thrives on competition— the struggle among businesses with similar products to attract consumers. The most efficient producers sell goods at lower prices. Lower prices attract buyers. If other producers cannot improve their productivity or offer a better-quality product, they might be forced out of business. Competition leads to greater efficiency, higher-quality products, and more satisfied customers. Private Property Rights Under capitalism, people and businesses have private property rights. This means they have the freedom to own and use their property as they wish. They can even choose to dispose of, or get rid of, that property. Private property rights give Americans the incentive, or drive, to work, save, and invest. That is the case because we can keep any gains that we earn. Private property has another important benefit; people tend to take better care of things they own. PROGRESS CHECK Explaining Why do people risk their money to start businesses? American Entrepreneurs T he woman known as C. J. Walker was born Sarah Breedlove in 1867 to parents who were emancipated slaves. She was poor and had little formal education, but she became one of the first woman millionaires in this country. With an initial investment of $1.50 in savings, Walker developed a line of beauty products for black women. Thousands of Walker saleswomen sold the popular products door-to-door. Her business earned $500,000 per year, an income she grew further by investing in real estate. C. J. Walker attributed her success to hard work and a willingness to take chances. “I . . . came from the cotton fields of the South. From there I was promoted Reading HELP DESK competition the struggle that goes on between buyers and sellers to get the best products at the lowest prices 496 The American Economy SS.7.E.2.4 to the washtub. From there I was promoted to the cook kitchen. And from there I promoted myself into the business of manufacturing hair goods and preparations.” Walker became a well-known philanthropist in the African American community. She used her wealth to fund scholarships and to support artists and writers. She gave to civil rights organizations, including the NAACP. Looking at Leadership How does Walker’s story serve as an example of entrepreneurship? Identify entrepreneurs from various gender, social, and ethnic backgrounds who started a business seeking to make a profit. private property rights the freedom to own and use our property as we choose as long as we do not interfere with the rights of others Academic Vocabulary dispose to get rid of; to eliminate incentive a reward offered to try to persuade people to take certain economic actions PHOTO: Michael Ochs Archives/Getty Images • C. J. Walker, Beauty Products Entrepreneur The Origins of U.S. Capitalism GUIDING QUESTION How is the history of capitalism associated with the Founders? In 1776 Adam Smith, a Scottish philosopher and economist, published a book titled The Wealth of Nations. The book is still important today. In fact, Smith is considered to be the father of modern economics. In his book, Smith argues that the best way for society to advance is for people to work for their own selfinterest, or their own well-being. Businesses want to make money. That desire will lead them to make products that people need and want. People will give their money to the businesses that supply those needs and wants. In a similar fashion, people compete to sell their labor and employers compete to purchase it. The result is an efficient use of resources and a stable society. In addition, Smith argued that all of this happens naturally, “as if by an invisible hand.” In other words, market exchanges work best with little government interference. From the writings of Smith and others came the idea of laissez-faire (leh•say•FEHR) economics. Laissez-faire, a French term, means “to let alone.” According to this philosophy, government should not interfere in the marketplace. Instead, it should limit itself to those actions needed to make sure that competition is allowed to take place. When the United States was formed, many of the Founders were influenced by The Wealth of Nations. James Madison read it, and Alexander Hamilton borrowed from it in his writings. Thomas Jefferson wrote, “In political economy [economics], I think Smith’s Wealth of Nations is the best book.” PROGRESS CHECK Explaining What role did Adam Smith believe government should play in the marketplace? NGSSS covered in “The Origins of U.S. Capitalism” SS.7.E.1.1 Explain how the principles of a market and a mixed economy helped to develop the United States into a democratic nation. SS.7.E.1.5 Assess how profits, incentives, and competition motivate individuals, households, and businesses in a free market economy. Why It MATTERS Competition in Your Life Have you ever competed with other students for placement on a team, a role in a school production, or to represent your school in some other way? Do you think this competition resulted in a better team or production? Explain. SS.7.E.1.5 laissez-faire economics belief that government should not interfere in the marketplace LESSON 3 REVIEW Vocabulary 1. What are the key features of capitalism and free enterprise in the U.S. economy? LA.7.1.6.1 2. What are private property rights? How are you affected by them? LA.7.1.6.1 Answer the Guiding Questions 3. Determining Under capitalism, who decides what gets produced and who uses the goods and services? SS.7.E.1.3 4. Drawing Conclusions How did the writings of Adam Smith influence the economy of the United States? SS.7.E.1.1 5. PERSUASIVE WRITING Adam Smith said that people work for their own self-interest. Write a paragraph describing this idea and whether you agree with it. Use examples of particular jobs to support your opinion. SS.7.E.1.5 Lesson 3 497