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Chapter 3: American Free Enterprise
Section 1
Key Terms
• profit motive: the incentive that drives
individuals and business owners
• open opportunity: the principle that
anyone can compete in the marketplace
• legal equality: the principle that everyone
has the same legal rights
• private property rights: the principle that
people have the right to control their
possessions and use them as they wish
Chapter 3, Opener
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Slide 9
Key Terms, cont.
• free contract: the principle that people
may decide what agreements they want to
enter into
• voluntary exchange: the principle that
people may decide what, when, and how
they want to buy and sell
• interest group: a private organization that
tries to persuade public officials to act in
ways that benefit its members
• patriotism: love of one’s country
Chapter 3, Opener
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Slide 10
Key Terms, cont.
• eminent domain: the right of a
government to take private property for
public use
• public interest: the concerns of society
as a whole
• public discourse laws: laws requiring
companies to provide information about
their products or services
Chapter 3, Opener
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Slide 11
Introduction
• What are the benefits of free enterprise?
– Free enterprise makes it possible for people
who have ideas and persistence to start
businesses and make themselves successful.
– Free enterprise also offers a great deal of
economic freedom to the consumer.
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Slide 12
What is Free Enterprise?
• The United States is considered by many to be a
“land of opportunity.”
• The American tradition
of free enterprise has
been a key factor in
supporting this belief.
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Slide 13
Principles of Free Enterprise
• Characteristics of a free enterprise include:
– Profit motive
• The American economy rests on recognition of
the profit motive as a key incentive. In a free
enterprise businesspeople make decisions
based on what will increase their profits.
– Open opportunity
• The American principle of open opportunity
says that anyone can compete in the
marketplace.
Chapter 3, Opener
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Slide 14
Principles, cont.
• Checkpoint: What are three key economic rights
that Americans enjoy?
– Legal equity
• American free enterprise believes in the principle that
everyone has the same legal rights.
– Private property
• The free enterprise system allows people to make their
own decisions about their own property.
– Freedom to buy and sell
• People can decide what agreements to enter into, as
well as what, when, and how they want to buy and sell.
Chapter 3, Opener
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Slide 15
The Role of the Consumer
• Checkpoint: What role do consumers play in a
free enterprise system?
– In the free enterprise system consumers have the
freedom to make their own economic choices.
Through voluntary exchange, consumers send a
signal to businesses, telling them what to produce
and how much to make.
– Consumers can also make their wishes known to
businesses by joining interest groups, which influence
public officials to act in ways that benefit its members.
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Slide 16
The Constitution
• Free enterprise in the United States is
written into the framework of the U.S.
Constitution.
– One right granted by the Constitution is the
5th Amendment, which protects private
property from being taken from a citizen
without due process.
– However, the government is allowed to take
property from an individual, paying fair market
value for that property, when there is a public
reason. This is known as eminent domain.
Chapter 3, Opener
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Slide 18
The Constitution, cont.
• The Constitution also spells out how
government can tax individuals and
businesses.
– According to Article 1, Congress could levy
taxes but not until the passage of the
Sixteenth Amendment in 1913 Congress
could levy an income tax on individuals and
businesses.
• Finally, the Constitution guarantees people
and businesses the right to make
contracts.
Chapter 3, Opener
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Slide 19
The Role of Government
• The government plays many roles in the
marketplace.
• These roles include:
– Carrying out the constitutional responsibilities
to protect property rights, contracts, and other
business activities
– Making sure that producers provide
consumers with information
– Protecting the health, safety, and well-being
of consumers.
Chapter 3, Opener
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Slide 20
Major Federal Regulatory Agencies
• All of the agencies to
the right represent
ways the federal
government
intervenes in the
marketplace.
– Identify one agency
meant to protect each
of the following:
(a) public safety,
(b) fair competition,
(c) equality.
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Slide 21
Negative Effects of Regulation
• Negative effects of
government include:
– Rules are costly to
implement
– Regulations stifle
competition
– Increased government
spending in industries
because the government
has to hire workers to do
the actual oversight
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Slide 22
Chapter 3: American Free Enterprise
Section 2
Key Terms
• macroeconomics: the study of economic
behavior and decision-making in a nation’s
economy
• microeconomics: the study of the economic
behavior and decision-making in small units,
such as households and firms
• gross domestic product: the total value of all
final goods and services produced in a country
in a given year
• business cycle: a period of macroeconomic
expansion, or growth, followed by one of
contraction, or decline
Chapter 3, Opener
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Slide 26
Key Terms, cont.
• referendum: a proposed law submitted directly to
the public
• obsolescence: situation in which older products
and processes become out-of-date
• patent: a government license that gives the inventor
of a new product the exclusive right to produce and
sell it
• copyright: a government license that grants an
author exclusive rights to publish and sell creative
works
• work ethic: a commitment to the value of work
Chapter 3, Opener
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Slide 27
Introduction
• How does the U.S. government encourage
growth and stability?
– The U.S. government encourages growth and
stability by:
•
•
•
•
•
Chapter 3, Opener
Tracking business cycles
Promoting a high employment rate
Keeping prices stable
Encouraging the development of new technologies
Taking pride in the American work ethic
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Slide 28
Tracking Business Cycles
• Even under the free
enterprise system, the
government
intervenes to
influence
macroeconomic
trends.
• One measure of the
nation’s economic
well-being is gross
domestic product
(GDP).
Chapter 3, Opener
How much did the GDP grow
between 1990 and 2006?
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Slide 29
GDP and the Business Cycle
• During a period of growth, GDP goes up
and in a period of contraction, GDP goes
down.
• This pattern of a period of expansion
followed by a period of contraction is
called a business cycle.
– Changes in the business cycle take place
because individuals and businesses, acting in
their own self-interest, make decisions about
factors such as prices, production, and
consumption.
Chapter 3, Opener
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Slide 30
Promoting Economic Strength
• Checkpoint: What three goals does the
government try to meet when promoting
economic strength?
– High employment
– Economic growth
– Stability and security
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Slide 31
Employment and Growth
• Employment
– The government strives to make sure there
are enough jobs for everyone who is able
to work.
– An unemployment rate between 4 percent
and 6 percent is considered healthy.
• Economic Growth
– To help spur economic growth, the
government can cut taxes or increase
spending.
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Slide 32
Stability and Security
• Stability and Security
– One indicator of economic stability is the
general level of prices.
– The government seeks to prevent sudden,
drastic shifts in prices so that neither the
consumer or the producer suffers.
– Another indicator of stability is financial
institutions such as banks and the stock
market. Government regulations seek to keep
these institutions as stable as possible.
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Slide 33
Economic Citizenship
• Voters have a say in promoting economic
strength by:
– Voting for public officials
– Voting on referendum
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Slide 34
Technological Progress
• Checkpoint: How
does improved
technology help the
economy?
– Technological
progress has enabled
the U.S. economy to
operate more
efficiently.
Chapter 3, Opener
These college entrepreneurs,
Gavin McIntyre and Eben Bayer,
created a new “green” insulation
partly from mushrooms they grew
under their beds.
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Slide 35
Technological Progress, cont.
• Many inventions have improved
productivity in the United States, including:
– The light bulb, which made a longer
workday possible
– The assembly line, which led to mass
production at affordable costs
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Slide 36
The Government’s Role
• The government promotes innovation and
invention to help maintain the country’s
technological advantage by:
– Funding research and development projects
at universities
– Establishing their own research institutions,
like NASA
– Granting patents and copyrights, which are an
incentive to innovation
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Slide 37
The American Work Ethic
• Economic growth cannot occur without
individual effort.
– Americans pride themselves on their strong
work ethic, which has them not only working
hard but caring about the work that they do.
– The American work ethic has long been seen
as a key ingredient in the nation’s productivity
and economic success.
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Slide 38
Chapter 3: American Free Enterprise
Section 3
Key Terms
• public good: a shared good or service for
which it would be inefficient or impractical to
make consumers pay individually and to
exclude those who did not pay
• public sector: the part of the economy that
involves the transactions of the government
• private sector: the part of the economy that
involves the transactions of individuals and
businesses
• infrastructure: the basic facilities that are
necessary for a society to function or grow
Chapter 3, Opener
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Slide 42
Key Terms, cont.
• free rider: someone who would not be willing 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 free
market, operating on its own, does not distribute
resources efficiently
• 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
Chapter 3, Opener
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Slide 43
Introduction
• Why does a society provide public goods?
– The government provides society with certain
public goods because it would be inefficient or
impractical for a free market economy to
provide these goods on its own.
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Slide 44
Public Goods
• A public good is a shared good or service
for which it would be inefficient or
impractical to make consumers pay
individually and to exclude those who do
not pay.
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Slide 45
Public Goods, cont.
• In the case of most
public goods it is
simply not practical
for a private business
to provide the service,
charge those who
benefit, and exclude
non payers from
using the source.
Maintaining street signs and
traffic lights is one economic
role of government.
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Slide 46
Public Goods, cont.
• Public goods can be used by any number of
consumers without reducing the benefits to any
single consumer.
• Public goods are
financed by the
public sector.
– Firefighters are an
example of a public
good.
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Slide 47
Costs and Benefits
• Checkpoint: What two criteria must be present
for a public good?
– The benefit to each
individual is less than
the cost that each
individual would have to
pay if it were provided
privately.
– The total benefits to
society are greater
than the total cost.
Chapter 3, Opener
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Slide 48
Costs and Benefits, cont.
• The government pays for public goods
through taxes.
• Thus, the financial burden on each
individual is significantly less than if a few
people decided to fund a project privately.
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Slide 49
Free Riders
• One issue associated with public goods is
known as the “free-rider problem.”
• Free riders are people who are not willing
to pay for a particular good or service but
would benefit from it if it were offered as a
public good.
– The free-rider problem suggests what would
happen if the government stopped providing
public goods: People would refuse to pay and
many services would be eliminated.
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Slide 50
Market Failures
• Checkpoint: Why are public goods an
example of a market failure?
– Public goods are examples of a market
failure, where the free market does not
distribute resources efficiently.
• For example, the free market would not be able to
build roads efficiently because building roads does
not meet the criteria for a properly functioning
market system. Thus, road construction is a
market failure.
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Slide 51
Positive Externalities
• Public goods involve externalities, which
may be either positive or negative.
• Positive Externalities
– Represent the beneficial side effects of public
goods.
– Can also be generated by the private sector.
– Allow someone who did not purchase a good
to enjoy part of the benefits of that good.
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Slide 52
Negative Externalities
• Negative externalities cause part of the cost of
producing a good or service to be paid for by
someone other than the producer.
Why would increased car traffic be considered a positive externality
by some people and a negative externality by others?
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Slide 53
Government’s Goals
• Understanding externalities helps us see
more roles that the government plays in
the U.S. economy.
– The government may take action to create
positive externalities, such as improving
education.
– The government aims to limit negative
externalities like pollution.
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Slide 54
Government’s Goals, cont.
• Many economists feel
that the private sector
produces more
positive externalities
that the government
does.
– This belief shows itself
in the debate over how
to stop pollution to the
environment.
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Slide 55
Chapter 3: American Free Enterprise
Section 4
Key Terms
• poverty threshold: an income level below that
which is needed to support families and
households
• welfare: government aid to the poor
• cash transfers: direct payment of money by the
government to the poor, disabled, or retired
people
• in-kind benefits: goods and services provided
for free or greatly reduced prices
• grant: a financial award given by a government
agency to a private individual or group in order
to carry out a specific task
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Slide 59
Introduction
• How does government help the poor?
– To help the poor, government programs take
money from some people and redistribute it to
others.
– Such programs include:
•
•
•
•
•
Chapter 3, Opener
The welfare system
Cash transfers
In-kind benefits
Medical and educational benefits
Grant money
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Slide 60
The Poverty Problem
• In a free market, the wealth is spread unevenly
throughout society, which leaves some people below the
poverty threshold.
• The U.S. Bureau of the Census sets the poverty
threshold based on the cost of the goods a family needs
to buy.
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Slide 61
The Government’s Role
• Checkpoint: What is the goal of the
government welfare program?
– The government provides a safety net to
groups like the very young, the very old, the
sick, the poor, and the disabled through
various federal, state, and local government
programs.
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Slide 62
The Government’s Role, cont.
• One government
program, the welfare
program, collects
funds from taxpayers
and redistributes this
money to those in
need.
– This system began
during the Great
Depression and
continues today.
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Slide 63
Welfare Reform
• Critics of welfare claim that it discourages
productivity and further aggravates
poverty.
– In 1996, new welfare reforms limited the
amount of time people could receive welfare
payments and gave states more freedom to
experiment with antipoverty programs.
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Slide 64
Redistribution Programs
• Government redistribution programs include the
following:
– Cash transfer programs
• Temporary Assistance for Needy Families
(TANF) - sends welfare payments directly to the states,
which design and run their own welfare programs
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Slide 65
Redistribution Programs, cont.
• Social Security - collects money from current
workers and redistributes funds to retired and
disabled persons
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Slide 66
Redistribution Programs, cont.
• Unemployment Insurance
– Provides money to workers who have lost
their jobs as long as recipients offer proof that
they have made efforts to get work.
– This help is only temporary, offering benefits
for only 26 weeks in most states.
• Worker’s Compensation
– Provides state funds to workers injured on
the job.
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Slide 67
In-Kind Benefits
• The government also provides poor people
with in-kind benefits, such as:
– Food stamps
• Qualified people
receive assistance
with their monthly
food purchases
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Slide 68
In-Kind Benefits, cont.
• Subsidized housing
– Qualified people are allowed to rent housing
for less than the regular rent
• Legal aid
– Qualified people receive legal advice at no
charge
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Slide 69
Medical and Educational Benefits
• The government
provides health care
to the elderly
(Medicare), the
disabled, the poor
(Medicaid), and
children who are
uninsured (SCHIP).
• The government also
funds educational
programs from
preschool to college.
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Slide 70
Encouraging Private Action
• Checkpoint: How does tax law provide an
incentive to help the needy?
– Federal tax laws allow both individuals and
corporations to take tax deductions for
charitable donations.
– The government may also provide grants and
other assistance to organizations that provide
social services.
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Slide 71