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American Free American Free Enterprise Enterprise Chapter 19 Section 3 Chapter 19 Section 3

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Page 1: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

American Free American Free EnterpriseEnterprise

Chapter 19 Section 3Chapter 19 Section 3

Page 2: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Section 1- Advantages of Free Section 1- Advantages of Free Enterprise SystemEnterprise System

U.S. is a capitalist U.S. is a capitalist economic systemeconomic system

This is all based on private This is all based on private ownership of the four ownership of the four factors of productionfactors of production

Consumers are free to Consumers are free to choose what they buy, choose what they buy, producers are free to producers are free to make what they like, and make what they like, and make as much profit as make as much profit as possible.possible.

Page 3: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

How Free Enterprise WorksHow Free Enterprise Works

Free EnterpriseFree Enterprise is just another name for is just another name for capitalismcapitalism

You are free to start a business that You are free to start a business that provides goods & services consumer provides goods & services consumer want to buywant to buy

Business is free to use scarce resources Business is free to use scarce resources as they pleaseas they please

Managers and workers operate these Managers and workers operate these businesses in exchange for paybusinesses in exchange for pay

Page 4: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Consumers Consumers decide what decide what they want to buythey want to buy

They look for They look for goodsgoods and and servicesservices to fulfill to fulfill wants for the wants for the best possible best possible valuevalue

Page 5: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

5 Characteristics of a Market Economy 5 Characteristics of a Market Economy from the “Chickenomics” videofrom the “Chickenomics” video

1. 1. Private ownership of resourcesPrivate ownership of resources

Ex. Chicken owns his costume Ex. Chicken owns his costume

and comedy routineand comedy routine

2. 2. Self-interest motiveSelf-interest motive

Ex. The chicken found he couldEx. The chicken found he could

make a living by entertaining make a living by entertaining

crowds at sporting events.crowds at sporting events.

Page 6: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

3. 3. Consumer sovereigntyConsumer sovereignty =Consumer is KING! =Consumer is KING!

Ex. Chicken lost his job as a radio dj because Ex. Chicken lost his job as a radio dj because he did not play the music listeners wanted he did not play the music listeners wanted to hear.to hear.

4.4. Markets: Markets: where transactions take placewhere transactions take place

5. 5. CompetitionCompetition

Ex. When the chicken Ex. When the chicken

sold chicken dolls, his success sold chicken dolls, his success

attracted competition. attracted competition.

Someone else began to sell Someone else began to sell

the new improved chicken doll.the new improved chicken doll.

Page 7: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Limits of Free EnterpriseLimits of Free Enterprise

Gov’t only limits free Gov’t only limits free enterprise in small enterprise in small ways ex. Can’t take ways ex. Can’t take advantage of advantage of consumers with unsafe consumers with unsafe productsproducts

Recent Toyota RecallDue to Bad Brakes

Page 8: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

3 Basic Freedoms of Free 3 Basic Freedoms of Free EnterpriseEnterprise

1. Right to Private Property- ability to 1. Right to Private Property- ability to own your own land, thoughts, and own your own land, thoughts, and material items.material items.

2. Open Opportunity- Anyone can take 2. Open Opportunity- Anyone can take part in the market by free choice. Ex. part in the market by free choice. Ex. No one can tell you that you can’t open No one can tell you that you can’t open a deli.a deli.

This creates a wide range of goods and This creates a wide range of goods and services to choose from. Forces all services to choose from. Forces all business to be productive and efficient.business to be productive and efficient.

Page 9: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

3. Profit Motive- 3. Profit Motive- force that force that encourages people encourages people to improve their to improve their wealth through wealth through economic activityeconomic activity

Ex. Scott decides Ex. Scott decides to open a to open a convenience store convenience store on Hwy 701 to on Hwy 701 to make moneymake money

Page 10: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Competition in Free Competition in Free EnterpriseEnterprise

Competition is the Competition is the struggle between struggle between buyers & sellers to buyers & sellers to get the best get the best products at the products at the lowest prices.lowest prices.

It creates reasonable It creates reasonable prices for the prices for the consumer, but still consumer, but still leads to profitleads to profit

Ex. Gas Station WarsEx. Gas Station Wars

Page 11: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Adam Smith “Father of Adam Smith “Father of Economics”Economics”

1776 Adam Smith a Scottish economist 1776 Adam Smith a Scottish economist described the basic principles of a market described the basic principles of a market economy (free enterprise system) in his economy (free enterprise system) in his book book Wealth of NationsWealth of Nations

He wrote that individuals left on their He wrote that individuals left on their own would work for their own self-own would work for their own self-interest.interest.

In doing so, they would be guided by an In doing so, they would be guided by an “invisible hand”“invisible hand” to use resources to use resources efficientlyefficiently

Page 12: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Laissez-faire economicsLaissez-faire economics

From the Adam Smith we get the From the Adam Smith we get the idea of ‘laissez-faire economics”idea of ‘laissez-faire economics”

Laissez-faireLaissez-faire-a french term--a french term- means “to let it alone” or means “to let it alone” or ““hands-off”hands-off”According to laissez-faire According to laissez-faire economics the govt. shouldeconomics the govt. shouldnot interfere in the marketplace.not interfere in the marketplace.

Page 13: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Section 2- How Does Free Section 2- How Does Free Enterprise Allocate Resources?Enterprise Allocate Resources?

ConsumersConsumers (buyers) are looking to get (buyers) are looking to get the best value of a good or service for the best value of a good or service for their bucktheir buck

ProducersProducers (sellers) as looking to make (sellers) as looking to make as much profit as possibleas much profit as possible

ProfitProfit- Money left over after paying for - Money left over after paying for production costs Revenue-Bills=Profitproduction costs Revenue-Bills=Profit

RevenueRevenue- Money made from selling a - Money made from selling a good or servicegood or service

Page 14: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

By trying to earn profit By trying to earn profit producers help to allocate producers help to allocate

resourcesresourcesAllocateAllocate- to set - to set

aside or locate aside or locate scarce resourcesscarce resources

We allocate our We allocate our money or set it money or set it aside to fulfill aside to fulfill wants that we wants that we feel are most feel are most important. Gas, important. Gas, Bills, FoodBills, Food

Page 15: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Ex. Seeking ProfitEx. Seeking Profit

Convenience StoresConvenience StoresThey charge a They charge a

reasonable yet higher reasonable yet higher price on their productsprice on their products

Making a profit, will Making a profit, will motivate Scott to open motivate Scott to open his own storehis own store

People allocate resources People allocate resources to places they know they to places they know they will make moneywill make money

Page 16: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Consumers Also Allocate Consumers Also Allocate ResourcesResources

When you buy a product you are When you buy a product you are choosing it over anotherchoosing it over another

This helps to influence what This helps to influence what producers will make and provideproducers will make and provide

Page 17: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Ex. Popularity of Energy Ex. Popularity of Energy DrinksDrinks

Ten years ago they Ten years ago they were not in demandwere not in demand

Now even the largest Now even the largest soft drink companies soft drink companies are making them due are making them due to popularityto popularity

Coke and Pepsi Coke and Pepsi allocated their allocated their resources and put resources and put more money into more money into making energy making energy drinks.drinks.

Page 18: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist
Page 19: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Role of Gov’t In Our EconomyRole of Gov’t In Our Economy

Our Gov’t plays a limited role in regulating Our Gov’t plays a limited role in regulating our economyour economy

We call this modified free enterpriseWe call this modified free enterprise Refer to Circular Flow Model of Gov’t Refer to Circular Flow Model of Gov’t

Interaction in economyInteraction in economy

Page 20: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Section 3- Gov’t and Free Section 3- Gov’t and Free EnterpriseEnterprise

Economic Economic Decisions Decisions are made by are made by buyers and buyers and sellers, this sellers, this is called the is called the free free enterprise enterprise sector of the sector of the economyeconomy

Page 21: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Public and Free Enterprise Public and Free Enterprise SectorSector

Public Sector- delivery Public Sector- delivery and services by and for and services by and for the gov’t ex. Military, the gov’t ex. Military, Social SecuritySocial Security

Free Enterprise Sector- Free Enterprise Sector- makes a good or a makes a good or a service if all costs and service if all costs and benefits go to the benefits go to the buyer and seller ex. buyer and seller ex. Ford Motor Co.Ford Motor Co.

Page 22: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

All of the goods and services All of the goods and services provided by the gov’t in public sector provided by the gov’t in public sector are funded by taxesare funded by taxes

Ex. Street lighting systemEx. Street lighting systemThese public goods can’t be taken These public goods can’t be taken

away even though you don’t pay away even though you don’t pay directly for them.directly for them.

Page 23: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

ExampleExample

You do not pay a usage You do not pay a usage fee for street lights fee for street lights every time they come every time they come on. Yet, everyone is on. Yet, everyone is able to benefit from able to benefit from them.them.

Your tax dollars pay for Your tax dollars pay for the lightsthe lights

Page 24: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Public Sector ExamplePublic Sector Example

MilitaryMilitaryEveryone Everyone

benefits from benefits from protectionprotection

Your Your protection protection does not take does not take away from away from others others protectionprotection

Page 25: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Taxes Taxes They are used to ensure They are used to ensure

that one person does not that one person does not pay for military services pay for military services or other public goods.or other public goods.

They are used to make They are used to make sure all people contribute sure all people contribute towards public goods in towards public goods in some waysome way

It would be impossible to It would be impossible to charge individually for all charge individually for all of these public servicesof these public services

Page 26: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Gov’t collects taxes to Gov’t collects taxes to prevent free riders prevent free riders from taking from taking advantage of public advantage of public goods and services goods and services without payingwithout paying

Ex. Fireworks Display, Ex. Fireworks Display, It would be impossible It would be impossible

to charge everyone to charge everyone who could see them who could see them to pay for them. So to pay for them. So city takes the money city takes the money out of tax dollarsout of tax dollars

Page 27: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Most Most infrastructure, infrastructure, mass transit, mass transit, highways, highways, water and water and sewer, is sewer, is funded by both funded by both the private the private sector- citizens sector- citizens and the public and the public sector- gov’tsector- gov’t

Page 28: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Positive ExternalityPositive Externality

Externality- side effect thatExternality- side effect that

affects someone other thanaffects someone other than

buyer or seller buyer or seller

Ex. I build a tire factory in Tarheel. It Ex. I build a tire factory in Tarheel. It will create jobs, bring in other will create jobs, bring in other businesses, and increase home businesses, and increase home valuesvalues

Page 29: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Gov’t SubsidiesGov’t Subsidies

Gov’t provides money to help cover Gov’t provides money to help cover the cost of an economic activity that the cost of an economic activity that may help lots of people.may help lots of people.

Ex. Gov’t provides subsidies to open Ex. Gov’t provides subsidies to open a free health clinic. It would benefit a free health clinic. It would benefit a whole communitya whole community

What would be another example of a What would be another example of a community benefit through subsidy community benefit through subsidy money?money?

Page 30: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Public Transfer PaymentsPublic Transfer Payments

Gov’t also helps the sick, elderly, and Gov’t also helps the sick, elderly, and poor in tough timespoor in tough times

Gov’t provides safety net programs Gov’t provides safety net programs to protect people from economic to protect people from economic hardshiphardship

Ex. Welfare, Social Security, Grants Ex. Welfare, Social Security, Grants

Page 31: American Free Enterprise Chapter 19 Section 3. Section 1- Advantages of Free Enterprise System U.S. is a capitalist economic system U.S. is a capitalist

Poverty in AmericaPoverty in America

A family of four A family of four making less than making less than $20,000 a year live $20,000 a year live below poverty level below poverty level 12% of U.S. pop12% of U.S. pop

Some families are Some families are poor for along time, poor for along time, but most move in but most move in and out of poverty and out of poverty over the yearsover the years