Transcript American Free Enterprise Chapter 3

American Free Enterprise
Chapter 3
Section 1- Advantages of Free
Enterprise System
U.S. is a capitalist economic
system
 This is all based on private
ownership of the four
factors of production
 Consumers are free to
choose what they buy,
producers are free to make
what they like, and make
as much profit as possible.

How Free Enterprise Works
Free Enterprise is just another name for
capitalism
 You are free to start a business that provides
usefulness to consumers
 Business is free to use scarce resources as
they please
 Managers and workers operate these
businesses in exchange for pay

Consumers decide
what they want to
buy
 They look for
goods and
services to fulfill
wants for the best
possible value

Limits of Free Enterprise
Gov’t only limits free
enterprise in small ways
ex. Can’t take advantage
of consumers with unsafe
products
 Some emerging nations
using free enterprise set
more limits
 Ex. Make companies offer
the same benefits

Five Freedoms of Free Enterprise
1. Right to Private Property- ability to own
your own land, thoughts, and material
items.
 2. Open Opportunity- Anyone can take
part in the market by free choice. Ex. No
one can tell you that you can’t open a deli.
 This creates a wide range of goods and
services to choose from. Forces all
business to be productive and efficient.

3. Legal Equality- Everyone in the
economy is protected by same economic
rights under law. Everyone has the right
to succeed or fail.
 4. Free Contract- People choose which
agreements to enter into in the market
place ex. Buying a house and agreeing
to pay a mortgage

5. Profit Motiveforce that
encourages people
to improve their
wealth through
economic activity
 Ex. You decide to
open a Sheetz on
Route 30 to
become wealthier

Competition in Free Enterprise
Drives prices down to
offset people true
ambitions to make as
much money as they
can
 It creates reasonable
prices for the
consumer, but still
leads to profit
 Ex. Gas Station Wars

Section 2- How Does Free Enterprise
Allocate Resources?
Consumers are looking to get the best
value of a good or service for their buck
 Producers as looking to make as much
profit as possible
 Profit- Money left over after paying for
production costs Revenue-Bills=Profit
 Revenue- Money made from selling a good
or service

By trying to earn profit producers
help to allocate resources
Allocate- to set
aside or locate
scarce resources
 We allocate our
money or set it
aside to fulfill wants
that we feel are
most important.
Gas, Bills, Food

Ex. Seeking Profit
Convenience Stores
 They charge a reasonable
yet higher price on their
products
 By convenience store A
making profit, it will
motivate Timmy to open
his own store
 People allocate resources
to places they know they
will make money

Resources are
now being
allocated (set
aside) for
convenience
stores instead
of another area
 This creates
competition and
variety in the
economy

Consumers Also Allocate Resources
When you buy a product you are choosing
it over another
 This helps to influence what producers will
make and provide

Ex. Popularity of Energy Drinks
Ten years ago they were
not in demand
 Now even the largest
soft drink companies are
making them due to
popularity
 Coke and Pepsi
allocated their resources
and put more money
into making energy
drinks.

Questions
What other trends have taken place in
society where a new product causes
companies to reallocate their resources
into a new product?
 How does a free enterprise system keep
their from being to many conveniences
stores in a market?

Role of Gov’t In Our Economy
Our Gov’t plays a limited role in regulating our
economy
 We call this modified free enterprise
 Refer to Circular Flow Model of Gov’t Interaction
in economy

Federal, State, and Local Gov’t takes tax
dollars from individuals, businesses, and
provides services ex. Military, Social
Security, Prints Money, Maintains Roads
 Product and Factor Markets provide
resources for gov’t to use to operate
 Ex. Gov’t workers, computers, land
 Federal gov’t employs less workers, but
spends way more $ to operate

Section 3- Gov’t and Free Enterprise

Economic
Decisions
are made by
buyers and
sellers, this
is called the
free
enterprise
sector of the
economy
Public and Free Enterprise Sector
Public Sector- delivery and
services by and for the
gov’t ex. Military, Social
Security
 Free Enterprise Sectormakes a good or a service
if all costs and benefits go
to the buyer and seller ex.
Ford Motor Co.

All of the goods and services provided by
the gov’t in public sector are funded by
taxes
 Ex. Street lighting system
 These public goods can’t be taken away
even though you don’t pay directly for
them.

Example

You do not pay a usage fee
for street lights every time
they come on. Yet,
everyone is able to benefit
from them.

Your tax dollars pay for the
lights
Public Sector Example
Military
 Everyone
benefits from
protection
 Your protection
does not take
away from
others
protection

Taxes
They are used to ensure
that one person does not
pay for military services or
other public goods.
 They are used to make sure
all people contribute
towards public goods in
some way
 It would be impossible to
charge individually for all of
these public services

Gov’t collects taxes to
prevent free riders from
taking advantage of
public goods and
services without paying
 Ex. Fireworks Display,
 It would be impossible
to charge everyone who
could see them to pay
for them. So city takes
the money out of tax
dollars

Example of Free Riders

Living on a
hippie
commune
Public and Private Sectors Share
Responsibilities
Private Sector- Businesses looking to make
profit ex. Pat’s Market
 Public Sector- gov’t goods and services
 Ex. Paying a toll on the turnpike
 Highway is built with some federal and
state money
 The rest of the highway we pay for in tolls


Most
infrastructure,
mass transit,
highways, water
and sewer, is
funded by both
the private
sector- citizens
and the public
sector- gov’t
Managing Externalities
Externality- side
effect that affects
someone other than
buyer or seller
 Negative Externalityimposes costs on
people who were
not involved
 Ex. First Energy and
the Black Rain in
Shippingport

Positive Externality
This creates benefits for people who were
not involved with economic activity
 Ex. I build a tire factory in Hookstown. It
will create jobs, bring in other businesses,
and increase home values
 Gov’t works to increase these positive
externalities

Gov’t Subsidies
Gov’t provides money to help cover the
cost of an economic activity that may help
lots of people.
 Ex. Gov’t provides subsidies to open a free
health clinic. It would benefit a whole
community
 What would be another example of a
community benefit through subsidy
money?

Public Transfer Payments
Gov’t also helps the sick, elderly, and poor
in tough times
 Gov’t provides safety net programs to
protect people from economic hardship
 Ex. Welfare, Social Security, Grants

Poverty in America
A family of four making
less than $20,000 a
year live below poverty
level 12% of U.S. pop
 Some families are poor
for along time, but
most move in and out
of poverty over the
years

Transfer Payments

Gov’t works to create jobs and helps
through transfer payments- Transfer of
income from one person or group to
another even though the payer receives
nothing in return
Private and Public Transfer Payments
Private Transfer Payments- this could be
help from a family, friend, or charity
 Public Transfer Payment- comes from the
gov’t using tax dollars that you don’t have
to pay back.
 Ex. Welfare, Social Security,
Unemployment
