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Economics Chapter 3
Sec. 1 – Benefits of Free Enterprise,
pp. 51-55
Profit Motive
• The force that
encourages people
and organizations to
improve their material
well-being
Open Opportunity
• The concept that
everyone can
compete in the
marketplace
Private Property Rights
• The concept that
people have the right
and privilege to
control their
possessions as they
wish
Free Contract
• The concept that people may decide what
agreements they want to enter into
Voluntary Exchange
• The concept that people
may decide what and when
they want to buy and sell
Competition
• Rivalry among sellers to
attract customers while
lowering costs
Interest Group
• A private organization
that tries to persuade
public officials to act or
vote according to the
group members’
interests
Public Interest
• The concerns of the
public as a whole
How does the Constitution protect
(which underlies) the American free
enterprise system?
• The Const. guarantees rights to engage in
business activities.
– Fed gov’t cannot take people’s private property
– Fed. gov’t cannot interfere in private contracts
– Constitution controls levying taxes
Explain three benefits of the free
enterprise system.
• An open opportunity
for all to compete in
the marketplace
• The production of a
variety of goods
and services
• Buyers and sellers
can decide what will
be produced
Explain your role as a consumer and how
you influence the economy.
• Decisions to buy or
not to buy an item
affects the variety,
quantity, and quality
of goods produced.
• Without purchases,
the economy fails to
thrive
Major Federal Regulatory Agencies
Year Created * Agency
What does the agency do?
1908 * Food & Drug Administration (FDA)
Sets & enforces standards for food, drugs, and
cosmetic products
1914 * Federal Trade Commission (FTC)
Enacts and enforces antitrust laws to protect
consumers
1934 * Federal Communications
Commission (FCC)
Regulates interstate and international
communications by media.
1958 * Federal Aviation Administration
(FAA)
Regulates civil aviation, air traffic, and piloting
standards, and air commerce
1964 * Equal Employment Opportunity
Commission (EEOC)
Promotes equal job opportunity through
enforcement of civil rights laws, education, and
other programs
1970 * Environmental Protection Agency
(EPA)
Enacts policies to protect human health and
the natural environment
1970 * Occupational Safety and Health
Administration (OSHA)
Enacts policies to save lives, prevent injuries,
and protect the health of workers
1972 * Consumer Product Safety
Commission (CPSC)
Enacts policies for reducing risks of harm from
consumer products
1974 * Nuclear Regulatory Commission
(NRC)
Regulates civilian use of nuclear products
Alice Rivlin
• What is the
Congressional
Budget Office?
• Federal agency
that helps
Congress
understand
government
spending issues
President Bill Clinton
appointments of Alice Rivlin . . .
• 1993: Director of the Office of
Management and Budget (OMB)
• 1996: Federal Reserve Board
(until 1999)
What does Alice Rivlin believe
encourages growth more than
cutting taxes?
• She believes programs that
increase over productivity, like
technology, transportation,
communications, and education
are a better approach to growth
than cutting taxes.
Alice Rivlin argues that
• Aid for business
should come from
• The State, where a
better knowledge of
specific needs exists.
Explain why you agree or
disagree with Rivlin’s opinion
about lowering taxes.
Economics – Ch. 3,
Section 2
Promoting Growth
and Stability
Macroeconomics
• The study of the behavior
and decision making of
entire economies
microeconomics
• The study of the
economic behavior
and decision making
of small units, such as
individuals, families,
and businesses
GDP (Gross Domestic Product)
• The total
value of all
final goods
and services
produced in a
particular
economy
Business Cycle
• A period of
macroeconomic
expansion
followed by a
period of
contraction
Work Ethic
• A commitment to the
value of work and
purposeful activity
technology
• The process used to produce
a good or service
How does GDP provide a means to
analyze economic growth?
• A strong GDP
reflects a healthy
economy; a
healthy economy is
the result of a wellfunctioning free
enterprise system.
Give one example of a new
technology that has resulted in
greater productivity in the United
States.
•
•
•
•
Telephones
Railroads
Automobiles
computers
How do patents and copyrights
promote innovation?
•Patents
provide
inventors the
exclusive
right to
market their
products for a
set period.
• Copyrights provide
licenses for authors or
artists to market their
creative works
• Both patents and
copyrights give
innovators economic
incentives to produce
new products
copyright
How does innovation help the economy?
• Innovation helps the
economy by leading to
greater productivity.
Key Terms
*Questions,
Ch 3, Sec. 3
Providing Public
Goods
Public Goods
• A shared good or
service for which it
would be impractical
to make consumers
pay individually and to
exclude nonpayers
Private Sector
• The part of the
economy that
involves the
transactions of
individuals and
businesses
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
Market Failure
• A situation in
which the
market does
not distribute
resources
efficiently
• Markets can fail because of:
• Negative externalities (e.g. the effects of environmental
pollution) causing the social cost of production to exceed the
private cost.
• Positive (or beneficial) externalities (e.g. the provision of
education and health care) causing the social benefit of
consumption to exceed the private benefit
• Imperfect information means merit goods are under-produced
while demerit goods are over-produced or over-consumed
• The private sector in a free-markets cannot profitably supply to
consumers pure public goods and quasi-public goods that
are needed to meet people’s needs and wants
• Market dominance by monopolies can lead to underproduction and higher prices than would exist under conditions
of competition
• Factor immobility causes unemployment hence productive
inefficiency
• Equity (fairness) issues. Markets can generate an
‘unacceptable’ distribution of income and consequent social
exclusion which the government may choose to change
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
Why is a free rider a type of market
failure?
• Free riders are market failures
because they involve people
consuming public goods and
services for which they have not
paid.
This is not efficient distribution of
goods
Questions, Ch 3, Sec. 4
Providing a Safety Net
Poverty Threshold
• An income level below that which is needed to
support families or households
Welfare
• Government aid to
the poor
Cash Transfers
• Direct payments of money to eligible poor
people
In-Kind Benefits
• Goods and services
provided for free or at
greatly reduced prices
What is the difference between
cash transfers and in-kind benefits?
• Cash transfers provide
people with direct payments
of money. In-kind benefits
provide goods and services
free or at reduced cost.
How is Social Security an example
of income redistribution?
• The Social Security
Administration taxes a
portion of citizens’
income while they are
working and redistributes
it to the nation’s elderly
and the disabled.
Pg. 71, “Government and the
Interstate Highway System”
• Why was it inefficient to
leave highway construction
to individual states?
• Individual state highway
numbering systems varied, and
these highways did not always
connect between states
Why do you think it took Congress
so long to authorize funds for
highway construction?
• Congress believed it was
the states’ job to construct
the roads and that it
would be an
overextension of
congressional power to
do it on the federal level.
What kind of externality?
• negative
TANF (Temporary Assistance for
Needy Families) provides . . .
• Cash to the States to
run the State welfare
programs
Difference between a business
cycle and the day-to-day ups and
downs of the market?
• Business cycle is a major, prolonged fluctuation
Critical rule for determining whether
something is a PUBLIC GOOD?
• Benefits to TOTAL SOCIETY
is greater than the total cost
EXAMPLES of PUBLIC GOODS
• Highways, municipal libraries, national parks.
public sidewalks, etc. . . .
• NOT a shopping mall !
OSHA (Occupational Safety and
Health Administration) – Federal
Agency that is . . .
• Enforces safety and
health laws for the
workplace
SOCIAL SECURITY provides
• Income for the elderly and some survivors;
some disabled persons and their dependents
Why does government make
businesses disclose information?
• To make buyers
more knowledgeable and safer
What is a positive externality?
• A beneficial economic side effect
Free Rider
• One who consumes a good or service, but
does not pay