American Free Enterprise Chapter 3

Benefits of Free Enterprise Chapter 3, Section 1

A Tradition of Free Enterprise   Americans have traditionally favored economic freedom over economic regulation.   What is the role of consumers in our free enterprise system? –Consumers influence producers through their buying decisions. –Consumers influence the government’s economic policies through voting and other techniques.

Free Enterprise vs. Protection  Although we favor free enterprise, we look to the government to provide consumers with protection –Give consumers rights –Provide for what the free market doesn’t  Military  Education

Constitutional Protection  The Constitution protects for business activities –Property Rights  Gov’t cannot take property from someone unless there is a public reason & then the gov’t will pay for it –Taxation…can only tax as laid out by the Constitution

Basic Principles of Free Enterprise  Profit Motive…encourages people to improve their well being  Rewards Innovation  Open Opportunity…everyone can compete in the marketplace  Your economic status can change when the market changes  Economic Rights…everyone has legal equality –Free contract…people may enter into agreements they choose –Voluntary exchange…people decide what they want to buy and sell

The Public Interest  Public interest can be described as concerns of the public as a whole.  The Government responds to public interest by creating public policy...laws and standards on issues of public interest  Consumers influence public policy through interest groups –Try to persuade public officials  Public disclosure laws protect consumers

Protecting Health, Safety, Well Being  Public disclosure laws –Require companies to give consumers information about their products  Some agencies that provide protection: –Food and Drug Administration (FDA) –Federal Communications Commission (FCC) –Federal Aviation Administration (FAA) –Equal Employment Opportunity Commission (EEOC) –Environmental Protection Agency (EPA) –Occupational Safety and Health Administration (OSHA)

Promoting Growth and Stability Chapter 3, Section 2

Business Cycles  Macroeconomics...study of behavior and decision making of entire economies  Microeconomics...study of behavior and decision making of individuals or small units

Business Cycles  GDP...gross domestic product...the total value of all final goods and services produced in an economy  Business cycles...period of macroeconomic expansion followed by a period of contraction –These are major fluctuations...not day to day ups and downs

Promoting Economic Strength  The government creates public policies to stabilize the economy in areas of: –Employment...consider between 4.5 and 5.5 % unemployment to be desirable (current) (current) –Growth…through innovation & technology –Stability...the government monitors banks to promote stability & prevent major shifts –Economic Citizenship...the government spends money to prevent wild swings in cycles

Innovation  The government encourages innovation and development of technologies by: –granting patents –providing federal funds for research  NASA

Providing Public Goods Chapter 3, Section 3

Providing Public Goods  Market Failure...a situation when the market on its own does not distribute resources efficiently  Many markets would experience market failure if left to the free market –Ex...roads...individuals will only pay for roads that benefit their own use. This would leave for an inefficient highway system

Public Goods  Public Goods...a good or service that is paid for by the public through taxes  Public goods are goods that it makes no sense for the individual to pay for –Dams –Roads –Bridges

Public Goods  Public goods: –benefit each individual more than they would pay for it –Provide greater benefit to society than the total cost –Ex...the dam is too expensive for one individual and provides years of benefit that far outweigh the cost of the project

Public Goods  Public goods are paid for by the public sector...the part of the economy that involves the transactions of the government  The private sector is the part of the economy that involves transactions of individuals  Free Riders...people who benefit from a good but would choose not to pay for it in the private sector –Ex...fire protection on a block

Externalities  Externalities are economic side effects that provide benefits or costs to someone other than a person who wants to produce or consume. –Externalities can be positive or negative  Ex...positive externality of the dam...swimming, boating and other recreation  Negative externality of the dam...loss of habitat, overcrowding etc...

Providing a Safety Net Chapter 3, Section 4

The Poverty Problem  The poverty threshold –An income level below what is needed to support a household –This is determined and adjusted by the government –Current rates...Poverty Poverty Thresholds 2004 Poverty Poverty Thresholds 2004Poverty Poverty Thresholds 2004  The government provides a safety net for those who need a higher standard of living

The Welfare System  Welfare is the general term that refers to government aid for the poor –Since 1930’s –Under FDR following the Great Depression

Redistribution Programs Cash transfers are direct payments of money to eligible people.

Other Benefits  In kind benefits...goods and services provided free of charge or at very reduced prices –Food stamps, subsidized housing, legal aid  Medical Benefits –Medicare...those over 65 –Medicaid...provided for the needy  Education –Subsidies for education add to the nation’s human capital

Review 1. Welfare includes all of the following EXCEPT –(a) Temporary Assistance to Needy Families. –(b) Occupational Safety and Health Administration. –(c) Social Security. –(d) Medicaid. 2. Education programs make the economy more productive by –(a) adding to human capital and labor productivity. –(b) reducing taxes. –(c) providing more jobs in manufacturing. –(d) reducing injuries on the job.