American Free American Free EnterpriseEnterprise

Chapter 3Chapter 3

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.

How Free Enterprise WorksHow Free Enterprise Works

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

You are free to start a business that You are free to start a business that provides usefulness to consumersprovides usefulness to consumers

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

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

They look for They look for goods and goods and services to fulfill services to fulfill wants for the wants for the best possible best possible valuevalue

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

Some emerging nations Some emerging nations using free enterprise using free enterprise set more limitsset more limits

Ex. Make companies Ex. Make companies offer the same benefitsoffer the same benefits

Five Freedoms of Free Five 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.

3. Legal Equality- Everyone in the 3. Legal Equality- Everyone in the economy is protected by same economy is protected by same economic rights under law. Everyone economic rights under law. Everyone has the right to succeed or fail.has the right to succeed or fail.

4. Free Contract- People choose 4. Free Contract- People choose which agreements to enter into in which agreements to enter into in the market place ex. Buying a the market place ex. Buying a house and agreeing to pay a house and agreeing to pay a mortgagemortgage

5. Profit Motive- 5. Profit Motive- force that force that encourages encourages people to people to improve their improve their wealth through wealth through economic activityeconomic activity

Ex. You decide to Ex. You decide to open a Sheetz on open a Sheetz on Route 30 to Route 30 to become wealthierbecome wealthier

Competition in Free Competition in Free EnterpriseEnterprise

Drives prices down to Drives prices down to offset people true offset people true ambitions to make as ambitions to make as much money as they much money as they cancan

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

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

Consumers are looking to get the best Consumers are looking to get the best value of a good or service for their buckvalue of a good or service for their buck

Producers as looking to make as much Producers as looking to make as much profit as possibleprofit as possible

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

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

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

resourcesresourcesAllocate- to set Allocate- 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

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

By convenience store A By convenience store A making profit, it will making profit, it will motivate Timmy to open motivate Timmy to open his own storehis own store

People allocate People allocate resources to places they resources to places they know they will make know they will make moneymoney

Resources are Resources are now being now being allocated (set allocated (set aside) for aside) for convenience convenience stores instead stores instead of another of another areaarea

This creates This creates competition competition and variety in and variety in the economythe economy

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

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.

QuestionsQuestions

What other trends have taken place What other trends have taken place in society where a new product in society where a new product causes companies to reallocate their causes companies to reallocate their resources into a new product?resources into a new product?

How does a free enterprise system How does a free enterprise system keep their from being to many keep their from being to many conveniences stores in a market?conveniences stores in a market?

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

Federal, State, and Local Gov’t takes Federal, State, and Local Gov’t takes tax dollars from individuals, tax dollars from individuals, businesses, and provides services ex. businesses, and provides services ex. Military, Social Security, Prints Money, Military, Social Security, Prints Money, Maintains RoadsMaintains Roads

Product and Factor Markets provide Product and Factor Markets provide resources for gov’t to use to operateresources for gov’t to use to operate

Ex. Gov’t workers, computers, landEx. Gov’t workers, computers, landFederal gov’t employs less workers, Federal gov’t employs less workers,

but spends way more $ to operatebut spends way more $ to operate

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

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.

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.

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

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

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

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

Example of Free RidersExample of Free Riders

Living on Living on a hippie a hippie communecommune

Public and Private Sectors Share Public and Private Sectors Share ResponsibilitiesResponsibilities

Private Sector- Businesses looking to Private Sector- Businesses looking to make profit ex. Pat’s Marketmake profit ex. Pat’s Market

Public Sector- gov’t goods and services Public Sector- gov’t goods and services Ex. Paying a toll on the turnpikeEx. Paying a toll on the turnpikeHighway is built with some federal and Highway is built with some federal and

state moneystate moneyThe rest of the highway we pay for in The rest of the highway we pay for in

tolls tolls

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

Managing ExternalitiesManaging Externalities

Externality- side Externality- side effect that affects effect that affects someone other someone other than buyer or sellerthan buyer or seller

Negative Negative Externality- Externality- imposes costs on imposes costs on people who were people who were not involvednot involved

Ex. First Energy Ex. First Energy and the Black Rain and the Black Rain in Shippingportin Shippingport

Positive ExternalityPositive Externality

This creates benefits for people who This creates benefits for people who were not involved with economic were not involved with economic activityactivity

Ex. I build a tire factory in Ex. I build a tire factory in Hookstown. It will create jobs, bring Hookstown. It will create jobs, bring in other businesses, and increase in other businesses, and increase home valueshome values

Gov’t works to increase these Gov’t works to increase these positive externalitiespositive externalities

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?

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

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

Transfer PaymentsTransfer Payments

Gov’t works to create jobs and helps Gov’t works to create jobs and helps through transfer payments- Transfer through transfer payments- Transfer of income from one person or group of income from one person or group to another even though the payer to another even though the payer receives nothing in returnreceives nothing in return

Private and Public Transfer Private and Public Transfer PaymentsPayments

Private Transfer Payments- this could Private Transfer Payments- this could be help from a family, friend, or be help from a family, friend, or charitycharity

Public Transfer Payment- comes from Public Transfer Payment- comes from the gov’t using tax dollars that you the gov’t using tax dollars that you don’t have to pay back.don’t have to pay back.

Ex. Welfare, Social Security, Ex. Welfare, Social Security, UnemploymentUnemployment