ch. 3: the american free enterprise...
TRANSCRIPT
Ch. 3: The American
Free Enterprise
System
Sec. 1: Advantages of the
Free Enterprise System
What is a Free Enterprise System?
Capitalism –
central idea – producers free to produce
the goods and services that consumers
want
consumers influenced by desire to buy
goods and services to satisfy econ. Wants
producers influenced by desire to earn
profits
Free enterprise system –
Example: United States
Monica Ramirez – starts business of
cosmetics for Latinas
creates Zalia Cosmetics
put whole saving account into
business – soon gained backers to
invest in business
outlets in major Hispanic markets –
business growing – gives back to
support Latina Entrepreneurs
One of 585,000 new businesses in US in 2001 – can see businesses everywhere
all examples of how individuals choices are the basis of a market economy
owners choose to start the enterprise
owners choose how to use their scarce productive resources
managers and workers voluntarily exchange labor for pay
consumers choose which goods and services they will buy
Govt. action usually limited –designed to protect or encourage competition or enforce contracts
Example: Emerging MarketsMexican Economy
Govt. plays much larger
role then US govt.
rules and regulations
make starting
business difficult
informal market has
grown as a result –
has driven retail stores out of business
street vendors and
vendors with stalls
Singapore Govt. very closely involved with
economy (Singapore Inc.)
Govt. says what benefits employers must provide employees
Workers must put certain percentage in Central Provident Fund – govt. saving scheme
fund pays pensions, and funds public projects (ed., health care, housing)
Govt. supportive of free enterprise
keeps business rents, taxes and costs low
How a Free Enterprise System
Works
Key freedom – private property – can exchange
it voluntarily – heart of free enterprise
Open opportunity – the ability of everyone to
enter and compete in the marketplace of his or
her own free choice
ensures market reflect wide range of interests
& talents and provides incentive to be
efficient and productive
Legal equality – a situation in which everyone
has the same economic rights under the law
Free contract – for voluntary exchange to work,
people must be able to decide for themselves
Which legal agreement they want to enter into –
business, job, or purchase commitment
What motivates people to start a business?
Profit motive – the incentive that encourages people and organizations to improve their
material well-being by seeking to gain from
economic activities
Producers seek highest possible price for
product
Competition offsets drive and forces prices
down
Helps producers find price that does not
deter buyer or inhibit profits
Example: Profit in Rocks Pet rock – Gary Dahl – a pet rock easier to care for than
regular pets
wrote a manual on pet rocks – training , tricks…
Aug. 1975 – packaged and sold with manual at gift shows
major department store purchased 500
became major story, with interviews and articles
by end of year – sold more than 2 tons – he is millionaire
1976 – consumers lost interest – Dahl gets out of the
business
Example: Competition Over
Books Books different then pet rocks – fierce
competition
before 1995 – small chain stores and
neighborhood booksellers dominate market
1995 – large chain stores – Barnes & Noble Inc.
and Border Group Inc. begin to compete
can buy in high volume and pass savings to
consumer
warm & welcoming atmosphere in stores –reading areas, cafes, book signings
1991 – independent booksellers account for 30%
on book sales in US
by 2005 – down to 15%
between 1995-2005 – 1,200 ind. Bookseller
went out of business
New challenge for chains – Amazon.com
huge database, quick & reliable delivery,
discount prices, easy to use web site
by 2004 – sales at $134 million a week
New challenge for Amazon – Overstock.com
& Buy.com
undercut Amazon’s prices and has excellent service
Consumers benefit from competition
Ind. Booksellers cannot match prices
can provide personal service and focus on local tastes or specialized topics
example of those who keep pace with the
market and adjust accordingly
Economic Pacesetter: Milton Friedman:
Promoter of Free Markets
Economics professor – b. July 31, 1912 – d. Nov. 16, 2006
career teaching at U. of Chicago – free market ideas – “Chicago School of Economics”
Market should be free to operate in all fields – even law & medicine
lowering licensing standards would bring more dr. and lawyers into market
would bring down costs of services
Govt. most important role is to control the amount of money in circulation
with no control, economy would experience inflation
Advisor for 2 presidents and head of state for several other countries
1976 – won Nobel prize for Economics
1980 – wrote Free to Choose –best seller nonfiction
1977 – 2006 – served as scholar at Hoover Institution, conservative public policy research center at Stanford University
Sec. 2: How Does Free
Enterprise Allocate Resources
The Roles of Producers and
Consumers
Profit – the money left over after the costs of
producing a product are subtracted from the revenue
gained by selling that product
Seeking profit is one way producers help allocate
scarce resources in the economy
Example:
Producers Seek
Profit
Neighborhood coffee shop
owners charge highest price consumers are willing to pay
possibility for good profit encourages other to open shops
productive resources got to the coffee shops instead of other businesses
profit seeking helps in allocation of resources
Example:
Consumers Vote
With Their Wallets
When consumers buy a product, they vote for it vs. another product
votes determine what will be produced in the future
ex. – low carb diets –interests peak and fall –producers respond based on votes of the
Consumers-consumer actions cause a reallocation of resources
Government in the US
Economy
Modified free enterprise economy – includes some govt.
protections, provisions, and regulations to adjust the free enterprise system
Modified Free
Enterprise
Figure 2.4 showed flow of resources and products moving in a circular flow between businesses and households
Figure 3.4 shows how govt. fits in
Govt. exacts costs and gives benefits
green arrows show flow of money
blue arrows show flow of products and resources
govt. is both consumers and producer
consumer in the resource market –spending to buy factors of prod.
consumer in product market – spending money in exchange for products
a producer – providing goods & services to households & businesses
collects money from businesses & households in form of taxes
covers costs of what is produced with this money
uses money to make purchases in the resource and product market
Figures 3.5 & 3.6 – show govt. a major consumer of resources and products
govt. employs about 22 million workers –16% of labor force
govt. consumption is over 2 trillion
Sec. 3: Government and Free Enterprise
Providing Public Goods Most production decisions made in the marketplace through the
interaction of buyers and sellers – the free enterprise sector
decisions made by different levels of govt. – the public sector
which sector produces a good or service?
if all costs borne by and benefits go to the buyer and seller, the free enterprise sector
Market failure – people who are not part of the marketplace
interaction benefit from it or pay part of the costs
when this happens – govt. sometimes provides goods or service
Public goods – goods and services that are provided by the govt.
and consumed by the public as a group
public goods are funded with taxes
Example: Characteristics of
Public Goods
Public goods have 2 characteristics:
1. people cannot be excluded from the benefits of
the product even if they do not pay for it
2. one person’s use of the product does not reduce its
usefulness to others
Street lighting
Impossible to exclude people
from using it
the benefit is not diminished
because other people use it
no way for private business to
establish a realistic price and
collect
local govt. provides and
collects taxes to cover cost
National defense
Everyone benefits from it
the benefit is not
diminished because other
people feel secure
Given the benefit – you
would readily pay for sense
of security
Everyone pays through
taxes to national govt.
Example: Free Riders
No incentive for business to produce public goods –
people will not voluntarily pay for it
people receive the benefit of these goods whether they
pay or not
Free rider – is a person who chooses not to pay for a
good or service but who benefits from it when it is
provided
one type of market failure
Fireworks Shows
Shows are very expensive – no way to charge people for watching the show
can charge for a very good spot, but others will still be able to see it
those who do not pay – free riders
Little interest in providing fireworks displays as a business opportunity
to address problem – govt. to provide certain goods and services
city govt. puts on the show and pays for it with taxes
costs and benefits shared throughout the community
Police Force
Everyone is protected
whether they pay or
not
best way to ensure
that those who benefit
pay their share is for
govt. to provide the
service by paying for it
with taxes
Public and Private Sectors – Shared
Responsibilities
Some goods provided by either sector
often toll goods – goods consumed by the public as a
group, but people can be excluded from using them
open for all to use, but have to pay a toll to use
initial funding for toll goods is provided by the public
sector, but day to day is provided by the private sector
Public and private share
responsibility for the nation’s
infrastructure
Ex. – highways, mass transit,
power, water, sewer systems,
education, health care
systems, fire and police services
if not have these things –
economy would come to a
halt
lose ability to move troops in
case of attack and evacuate
in emergency
Infrastructure – essential to
economic health
Managing Externalities
Externality – a side effect of a transaction that affects someone other than the producer or the buyer
Negative externality – is an externality that is a negative effect or cost for the people who are not involved in the original economic activity
ex – manufacturing company discharges pollution into a river – cost of pollution is borne by those who live near the river – even if no connection to company
Positive externality – is an externality that is a positive effect or benefit for people who were not involved in the original economic activity
neighbor plants a rose garden – everyone benefits from beauty
Example: Paying For the Negative
Externalities
Industrial pollution
Company has little incentive to
pay extra to reduce pollution
those living around it are going
to suffer from it, bear the cost
of clean-up and bear the
medical costs if ill
Limiting negative externalities is
important role of the govt.
govt. taxes or fines polluters
money raised can offset higher
medical costs
Tax or fine provides incentive
for owner to reduce pollution
Example: Spreading Positive Externalities
New college built Local business benefit from student
purchases
Workers benefit as businesses expand
Community benefits – taxes collected form students, more skilled and knowledgeable population
local govt. can spend more to provide public goods
govt. tries to increase positive externalities
Subsidy – is a govt. payment that helps cover the cost of an economic activity that is considered to be in the public interest
comes from taxes , so everyone shares the cost
ex. – given to drug companies to develop new vaccine
will benefit the whole community once it is in effect