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Economics
Chapter 3
American Free Enterprise
American Free Enterprise

A tradition that
encourages people
to try out their
business ideas and
compete in the
public market
Basic Principles of American Free
Enterprise
Economic
Freedom
Competition
Contracts
Voluntary
Exchange
American Free
Enterprise
Profit Motive
Private
Property
Self Interest
These basic features of free enterprise are so familiar to
us that we tend to take them for granted.
Voluntary Exchange

Act of buyers and
sellers freely and
willingly engaging
in market
transactions
Private Property


The concept that
people have the
right and the
privilege to control
their possessions
as they wish
The government
has the right to
imminent domain
Self-Interest


Means buyers and
sellers are focused
on personal gain
It motives
consumers to buy
the goods and
services they want
at the lowest
possible price
Profit Motive


Driving force that
encourages people
and organizations to
improve their material
well-being
People are free to risk
their savings or any
part of their wealth in
a business venture
with hopes of earning
a profit
Contracts


A legal agreement
between two or
more parties,
specifying the
actions to be taken
and the payments
to be made by
each party
Freedom to engage
in any type of
contract
Competition


Rivalry among
producers or sellers
of similar goods to
win more business
by offering the
lowest—prices or
better quality
Government
regulates
competition
Economic Freedom

The freedom of
households to own
factors of
production and
firms to produce
and distribute
goods and services
American Constitution

U. S. Constitution
guarantees
important rights
in business
activities
•
•
•
Property rights
Limits Taxation
Enforcing
Contracts
Role of Consumers


In a capitalist
system private
individuals own the
factors of
production and
decide how to use
them within the
limits of the law
Form Special
Interest Groups
Special Interest Groups

A private
organization that
tries to persuade
public officials to
act or vote
according to the
group’s interests
Four Important Functions of
Government
1.
2.
3.
4.
Regulating
Economic Activity
Ensuring
Economic Stability
Providing Public
Goods
Redistributing
income
Role of Government in Regulating
Economic Activity

Government carries
out their constitutional
responsibilities
through creation of
regulations and
regulatory agencies on
• Public disclosure
• Protecting Health,
Safety and Well-being
Major Functions of Government
Regulations




Protecting Consumers
Promoting
Competition
Supervising Labor and
Management Relations
Regulating Negative
By-products of the
Production Process
Federal Regulatory Agencies in the
United States
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Interstate Commerce Commission
Food and Drug Administration
Federal Trade Commission
Federal Communication Commission
Securities and Exchange Commission
National Labor Relations Board
Federal Aviation Administration
Equal Employment Opportunity Commission
Environmental Protection Agency
National Highway Traffic Safety Administration
Occupational Safety and Health Administration
Consumer Product Safety
Nuclear Regulatory Commission
Federal Energy Regulatory Commission
Interstate Commerce Commission
(ICC) 1887

Regulates rates
and other aspects
of commercial
transportation by
railroad, highway,
and waterway
Food and Drug Administration
(FDA) 1906


Enforces laws to
ensure purity,
effectiveness, and
truthful labeling of
food, drugs, and
cosmetics
Inspects
production and
shipment of these
products
Federal Trade Commission (FTC)
1934


Administers
antitrust laws
forbidding unfair
competition, pricefixing, and other
deceptive practices
Regulates product
warranties and
fraud in advertising
Federal Communication
Commission (FCC) 1934




Licenses and regulates
radio and television
stations
Regulates interstate
telephone, telegraph
rates and services
Creates and enforces
rules of behavior for
broadcasting
Most recently, regulates
satellite transmissions
and cable TV
Securities and Exchange
Commission (SEC) 1934

Regulates and
supervises the sale
of listed and
unlisted securities
and the brokers,
dealers, and
bankers who sell
them
National Labor Relations Board
(NLRB) 1935



Administers federal
labor-management
relations laws
Settles labor
disputes
Prevents unfair
labor practices
Federal Aviation Administration
(FAA) 1958



Regulates air
commerce
Sets standards for
pilot training,
aircraft
maintenance and
air traffic control
Controls U.S.
Airspace
Equal Employment Opportunity
Commission (EEOC) 1964

Investigates and
rules on charges of
discrimination by
employers and
labor unions
Environmental Protection Agency
(EPA) 1970

Coordinates federal
environmental
programs to fight
air and water
pollution
National Highway Traffic Safety
Administration (NHTSA) 1970


Sets and enforces
laws to promote
motor vehicle safety
and to protect drivers,
passengers, and
pedestrians
Sets safety and fuel
economy standards
for new motor vehicles
produced or sold in
the U.S.
Occupational Safety and Health
Administration (OSHA) 1970


Investigates
accidents at the
workplace
Enforces regulation
to protect
employees at work
Consumer Product Safety
Commission (CPSC) 1972

Sets and enforces
safety standards
for consumer
products
Nuclear Regulatory Commission
(NRC) 1974


Regulates the
nuclear power
industry
Licenses and
oversees the
design,
construction, and
operation of
nuclear power
plants
Federal Energy Regulatory
Commission (FERC) 1977




Fixes rates and regulates
the interstate
transportation and sale of
electricity, oil, and natural
gas
Issues permits and
licenses for hydroelectric
projects and gas pipelines
Supervises mergers and
stock issues of electric
power and natural gas
Sets rates for interstate
transportation of oil by
pipeline
Deregulation



Process of removing
government restrictions on
businesses
This deregulation started
with Jimmy Carter and
continues under the Bush
administration
The results of deregulation
have been quite good
because prices have been
held down by competition
among long-haul trucking
firms, the long-distance
phone companies, and the
airlines
Role of Government in Promoting
Economic Stability


Encouraging and
promoting
economic stability
means smoothing
the ups and downs
in the nation’s
overall business
activity
They do this by
using basic
economic principles
Two Levels of Economics

Macroeconomics deals
with the economy as a
whole
•
•
•
•

National output
Employment
Money Supply
Government Spending
Microeconomics
operates on the level
of individual business
firms
• Profit and satisfaction
maximization of firms
and consumers
Gross Domestic Product (GDP)



The nation’s
expenditure on all
the final goods and
services produced
during the year at
market prices
Used to measure
growth or decline
in the economy
C+I+G+X
Business Cycles


GDP is used to
predict business
cycles
Business cycles are
periods of
expansion followed
by periods of
decline
Government Macroeconomic Goals
THREE MAJOR ECONOMIC GOALS
High
Employment
Providing jobs
for everyone
who is able to
work
Steady
Growth
Enabling each
generation to
enjoy a higher
standard of living
than previous
generations
Stable
Prices
Preventing
sudden shifts
in prices
Government economists use a variety of policies in their
attempt to achieve these three major goals
High Standard of Living



Ways to maintain a
higher standard of
living is by
increasing
productivity
through
American Work
Ethic
Technology
Vs.
Work Ethic



A commitment to the
value of work and
purposeful activity
The Protestant work ethic
is a biblically based
teaching on the necessity
of hard work, perfection
and the goodness of
manual labor.
It is part of old American
culture of the 1800's and
is seen as one of the
cornerstones of American
prosperity
Technology

The body of knowhow about materials,
techniques of
production and
operation of
equipment, based on
the application of
scientific knowledge
Patents and Copyright

To promote the
progress of science
and useful arts, the
Constitution of the
United States gives
Congress the right
to grant:
• Patents
• Copyrights
Patent

A legal protection
for the inventor of
a product or
process that gives
the person or
company sole right
to produce the
product or use the
process for up to
17 years.
• Polaroid film
Copyright


Arts and literary works
are protected through
the issuance of a
copyright
It gives authors or
artists the exclusive
right to publish, sell,
or reproduce their
work for their lifetime
plus 50 years
• Beatles
Role of Government in Providing
Public Goods

A public good is a
shared good or
service for which it
would be inefficient
or impractical to
make consumers
pay individually
• Roads
• Dams
• National Defense
Advantages of Public Good


The benefit 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 vs. Private Sector

Public Sector is the
part of the economy
that involves
transactions of the
government
• Benefits Society

Private Sector is the
part of the economy
that involves the
transactions of
individuals and
business
• Profit motivation
Free Rider


A phenomenon
associated with public
goods
Someone who would
not choose to pay for
a certain good or
service, but would get
the benefits of it
anyway if it were
provided as a public
good
Market Failure


Situations in which
the free market
does not efficiently
provide resources
to solve a problem
These situations
can result in
government
intervention
Externalities

Economic side
effect that either
benefits or harms a
third party not
directly involved in
the activity
• Positive
externalities
• Negative
externalities
Positive Externalities

Occurs when some of
the benefits derived
from the production or
consumption of some
good or service are
enjoyed by a third
party
• Airport Expansion can
cause an increase in
jobs in the area
Negative Externalities

Occurs when the
production or
consumption of some
good or service inflicts
costs on a third party
without compensation
• Airport Expansion can
cause an increase in
noise in the area after
the runways are built
Government Goals in
Externalities

Encourages the
creation of positive
externalities
• Education increases
productivity in
workers

Aims to limit
negative
externalities
• Pollution
regulations
Is a Dam a Public Good?
Example A: Market
Failure Occurs
Example B: Public
Good is Created
Proposal: Farmers
want a local river to
be dammed
Benefit: The
dam will
provide
irrigation
water for the
farmers crops
Cost: If the
cost were
shared, the cost
to each farmer
would outweigh
the benefits to
each farmer
Decision: No
The farmers need a
dam but won’t pay for
it
Proposal: The
government considers
funding the dam
Benefit : The dam
will provide
hydroelectric
power for the
region, Irrigation,
tourism, an
artificial lake
Decision: Yes
The farmers need
a dam but won’t
pay for it
Result
Cost If the cost is
shared among all
taxpayers the cost
to each person will
be less than the
benefit to each
person
The benefits of the
dam extend to so many
people that their collective
benefits exceeds the total
cost of the dam
Poverty Threshold


The minimum level of
income, as
determined by the
government, that is
needed to support a
household
To ease poverty the
government
• Collects taxes
• Redistributes taxes in
the form of Welfare
Role of Government in
Redistributing Income

Because the free
market system tends
to distribute wealth
unevenly the
government runs
programs to help
people in need
•
•
•
•
•
Cash transfers
In-Kind Benefits
Medical Benefits
Education
Faith-Based Initiatives
Cash Transfers

Direct payments of
money to poor,
disabled and retired
people by the federal
and state
governments
• TANF
• Social Security
• Unemployment
Insurance
• Worker’s Compensation
Temporary Assistance for Needy
Families (TANF)



Federal money goes to
states to design and
run their own welfare
program
Aims to move people
from welfare
dependence to the
work force
Establishes a life time
limit
Social Security


Provides cash
transfers of retirement
income to the elderly
and living expenses to
disabled Americans
The program collects
payroll taxes from the
current workers and
then redistributes that
money to current
recipients
Unemployment Insurance



Insurance that
employers pay for
through payroll taxes
Nearly all American
workers who lose their
jobs through no fault
of their own can
collect this insurance
Workers who are fired
because of misconduct
or who quit without
good reason generally
cannot collect it
Workers’ Compensation


Provides a cash
transfer of state
funds to workers
injured on the job
Most employers
must pay workers’
compensation
insurance to cover
any future claims
their employees
might make
In-Kind Benefits

Goods and
Services provided
for free or at very
low prices
•
•
•
•
Food Stamps
Subsidized Housing
Food Giveaways
Legal Aid
Medical Benefits


Another important
social service that the
government provides
is health insurance
Medicare
• Covers Americans over
age 65 as well as
disabled

Medicaid
• Assists the poor who
are unemployed or not
covered by their
employer’s insurance
Education


Federal and State
governments fund
programs from
preschool to
college
Education
programs add to
the nation’s human
capital
Faith-Based Initiatives


President Bush’s
initiative to rely on
non-governmental
support for people in
need
Bill was passed in
2003 in the next step
to welfare reform that
allows faith-based
organizations to
compete for federal
funds