Download the american free enterprise system

THE AMERICAN FREE
ENTERPRISE SYSTEM
• IN THIS SECTION YOU MUST BE…
– Able to describe the tradition of the Free
enterprise system in the U.S. and the
constitutional protections that underlie it.
– Able to explain the basic principles of the
U.S. free enterprise system.
– Able to identify the role of the consumer in
the U.S. free enterprise system.
– Describe the role of government in the U.S.
free enterprise system.
UNDERSTANDING THE FREE
ENTERPRISE SYSTEM
• The free enterprise system is an economic
system characterized by… (KNOW!!!)
– Private or corporate ownership of capital
goods.
– Investments that are determined by private
decision rather than by government and
determined in a free market.
• Historically America has been
considered “the land of opportunity.”
• Why?
– The free enterprise system socially and
politically gives people the commitment
and flexibility try out their business ideas
and to compete in the marketplace.
– Politically the government works together
with society to promote the concept of free
enterprise. For example…
– Politically the government works together with
society to promote the concept of free
enterprise. For example the government…
(KNOW)
• Protects property rights –– Under the free
enterprise system individuals are encouraged to
become innovative and expand their ideas and
businesses without fear that the government will
take over their business or their property.
• Contains rules for taxation – entrepreneurs don’t
have to fear being overly taxed by the government
thereby suffering undo loss of profits.
• The Constitution guarantees businesses the right
to make binding contracts thereby ensuring that
they get paid for their products or services.
• Socially, the Basic Principles of free enterprise
encourages society to engage in
entrepreneurship, competition, and the free
market.
• The free enterprise economy has seven key
characteristics…
– Open opportunity – the concept that everyone
can compete in the market place.
• Everyone has the opportunity to make it big or to
lose everything.
• A business idea or endeavor does not necessarily
guarantee success, only opportunity.
• The free enterprise economy has seven key
characteristics…(KNOW)
– Profit motive – the American economy rests on
a recognition of the importance of profit
motive, the force encourages people and
organizations to improve their material wellbeing..
• Business owners make their own choices to operate
in ways they believe will maximize profits.
– Government works with society to ensure that businesses
do not take advantage of consumers in order to maximize
profits.
– Legal equality – everyone has the same legal
rights to compete in the economic market
place.
– Private property rights – the concept that
people have the right and privilege to control
their possessions as they wish.
– Free contracts - allow people to decide what
agreements they want to enter into.
– Voluntary exchange – allows people to decide
what and when they want to buy and sell
rather than forcing them to buy or sell at
particular times and at specific prices.
– Competition – rivalry among sellers to attract
consumers while lowering costs.
• Competition provides consumers with a choice of a
larger variety of goods, most of which are sold at
reasonable prices.
• What is the primary reason that there are many
different makes and models of automobile?
• Why are the different makes similar to others?
• Consumer’s Role in free enterprise –
– Consumers make their own economic
choices in a free enterprise system.
– Consumers make their desires known
through their economic dealings with
producers.
– By purchasing products, consumers
signal to producers what to make and how
much to make.
– Consumers can also make their wishes
known by joining an interest group, a
private organization that tries to persuade
public officials to act or vote according to
the interest of the group’s members.
• Consumer’s Role in free enterprise –
– Consumers can also make their wishes
known by joining an interest group, a
private organization that tries to persuade
public officials to act or vote according to
the interest of the group’s members.
• How would a group such as “The Committee
for Family Values and Decency” try to influence
public officials when an entrepreneur tries to
open an “Adult Store” in their neighborhood?
• How would a consumer advocate group try to
influence public officials in regards to a
product such as “lead based paint?”
• Government’s Role in free enterprise –
– The government ensures that producers
provide consumers with information about
their product.
• Public disclosure laws – require companies to
give consumers important information about
their products.
– Government agencies regulate industries
whose goods and services affect the
health, safety, well-being of the public. An
example would be...
• Food and Drug Administration
• Federal Trade Commission
• Government’s Role in free enterprise –
– The government’s role can have a negative
effect on free enterprise.
• Regulations can reduce profits and raise
prices.
• In terms of protecting the health, well-being,
and safety of consumers what are the tradeoffs and opportunity costs of government
regulations?
– Would you rather pay more for an airplane ticket or
take a chance on crashing?
– Would you rather pay more for a car or have an
airbag on each side of the car just in case?
• Government’s Role in free enterprise –
– The government sets manufacturing
standards that…
• Requires drugs to be safe & effective
• Supervises sanitary conditions where food is
produced or served.
• Labels on equipment about the safe operation
of the equipment or expiration dates of
perishables.
PROMOTING GROWTH &
STABILITY
• In this section you will…
– Explain how the government tracks and
seeks to influence business cycles.
• A business cycle is a period of economic
expansion followed by a period of contraction.
– Analyze how the government promotes
economic strength.
– Analyze the effect of technology on
productivity
BUSINES CYCLE
• Macroeconomics – the study of the
behavior and decision making of entire
economies.
– This branch of economics examines major
trends for the economy as a whole
• Microeconomics – the study of the
economic behavior and decision
making of small units such as
individuals, families, households, &
businesses
• Gross Domestic Product (GDP) – the
total value of all goods and services
produced in an economy
– Economists use the GDP and other key
statistics to predict business cycles.
• Promoting economic strength – since
the economy is subject to business
cycles the government uses public
policies to stabilize the economy.
– Government polices have three goals
• Promoting economic strength –
– Government polices have three goals
(KNOW)
• Employment – government seeks to create an
economy that can provide a job for everyone
who is able to and wants to work.
• Growth – The economy must grow to provide
additional goods & services to an increasing
population.
• Stability – stability gives consumers,
producers, and investors confidence in the
economy and in our financial institutions.
• Promoting economic strength –
– Government polices have three goals
(KNOW)
• Stability – stability gives consumers,
producers, and investors confidence in the
economy and in our financial institutions.
– Stability prevents sudden and drastic shifts in prices.
– Stability promotes confidence in our financial
institutions.
• Technology & Productivity – America
increases its productivity primarily
through two means, technology and
work ethic.
– Work ethic – a commitment to the value of
work and purposeful activity.
• The more purposeful workers are the more
productive the economy becomes.
• What can happen to the work ethic in a society
where there is a “Free Rider” problem?
– Technology – The process used to
produce goods or services.
• Improvements in technology allow an economy
to produce
• Technology & Productivity – America
increases its productivity primarily
through two means, technology and
work ethic.
– Technology – The process used to
produce goods or services.
• Improvements in technology allow an economy
to produce more output from the same quantity
of inputs, or resources.
– Example- The potato to tater tots to hash browns to
potato whiskey
PROVIDING PUBLIC GOODS
• A Public Good – is a shared good or
service for which it would be
impractical to make consumers pay
individually and exclude non-payers.
– Example - A road or highway would fit this
description.
– What would happen to our society if all
schools were privately owned?
• Cost & Benefits of providing public
goods.
– The benefits to each individual is less than
the cost that each would have to pay if it
were provided privately.
– The total benefits to society are greater
than the total cost.
– Public goods are financed by the public
sector, the part of the economy that
involves the transactions of the
government.
– The private sector, the part of the economy
that involves the transactions of individuals
have little incentive to produce public
goods.
• Free Rider Problem.- A free rider is
someone who choose not to pay for a
certain good or service, but would get to
benefit from it as if it were provided as a
public good.
– Example – taxpayer pay for fire protection
yet non- tax payers benefit.
– Free riders consume what they do not pay
for.
• Market Failures – a situation in which the
market on its own does not distribute
resources efficiently. Free riders are an
example of a market failure.
• Market Failures – a situation in which the
market on its own does not distribute
resources efficiently.
– In a free market individuals determine what
goods and services get made, how they get
made, and who consumes them.
– If a company built roads in a particular area
there would be no competition.
– Most companies would only build roads in
densely populated areas. That is why
economists consider this scenario a market
failure.
• Externalities – an economic side effect of
a good or service that generates cost or
benefit to someone other than the persons
deciding how much to produce or consume.
– A positive externality generates benefits.
• Refurbishing an old house in the neighborhood
and selling it at a high price.
– Benefit – the price of other homes go up to adjust with
the sale of the old house.
– A negative externality generates costs to
someone other than the producer –
• A drought kills acres of tobacco.
– Costs - The price of cigarettes go up