The Economic System At Work

Economic Freedoms: Freedom to Buy & Sell Americans are free to buy and sell any legal product Producers are generally free to sell goods and services at prices they think buyers will pay If people don’t buy a product or service, the producer is free to change the price or sell something else Free Market- exchange between buyers and sellers who are free to choose

Economic Freedoms: Freedom to Compete Free Competition- American businesses compete with each other for customers Buyers show which goods and services they favor every time they make a purchase If consumers do not buy a product, producers will make something else or they’ll go out of business Producers compete to make what they think the public will buy

Economic Freedoms: Freedom to Earn a Profit Profit is the income businesses have left after all their expenses are paid Profit Motive is essential to a free economic system The hope of making a profit is why people start and operate businesses in the first place Profits are also the reason people invest in various businesses and valuable goods

Economic Freedoms: Freedom to Own Property Americans have the right to own and use their land, personal belongings, and other kinds of property Free market and free competition would be impossible without rights to private ownership of property Americans have the right to use their money to buy buildings, land, tools, and machines Can use this property to start their own businesses and earn profits

Economic Freedoms: Freedom to Own Property Americans have the right to protect their ideas and inventions by copyrights and patents Copyright- exclusive right to publish or sell a written, musical, or artistic work Patent- exclusive right to make and sell an invention for a certain number of years

Resources in a Free Market People’s needs and wants are often greater than the resources available Raw materials, manufactured parts, skilled labor, valuable property Problem of limited resources is called scarcity Our free market helps determine how Americans will use these limited resources Businesses must supply what buyers in the market demand If consumers want scarce goods, they must pay the market price

Supply & Demand People demand goods and services, and businesses supply them The balance of supply and demand determines the prices and quantities of these goods/services Law of Supply- businesses will provide more products when they can sell them at higher prices; they will provide fewer products when they have to sell those goods at lower prices Law of Demand- buyers will demand more products when they can buy them at a lower price; they will purchase fewer products when they must purchase them at a higher price

Supply & Demand Curve

Capitalism Capital is money invested in buildings, machines, and other forms of property to produce goods or provide services Capitalism- economic system based on private or corporate ownership of capital Capitalism encourages people to work and to invest and encourages businesspeople to supply Americans with products/services they want, at prices they are willing to pay Encourages work, investment, and production of desired goods

The Free-Enterprise System American businesses are generally free to run their businesses in the way they think is best Don’t depend on government officials to tell them how to operate Free-Enterprise Systems represent the freedom to compete without unreasonable governmental interference This freedom also comes with risks- businesses must accept losses if they make a mistake These mistakes may cause businesses to lose money or even have to close

Rise of Big Businesses American businesses have always been privately owned Industrial Revolution in late 1800s- businesses grew bigger by benefitting from the development of new technologies Greatly increased the amount of goods produced while lowering the cost of production Owners of these large factories and businesses made huge profits, even though their practices would be considered unfair or illegal today

Monopolies Monopolies- businesses that are the only ones selling a product or providing a service If there is no other competition, these businesses can control the price of that particular product/service This is particularly dangerous if the product is a necessity, like food People would have no choice but to pay whatever price that businesses is charging

Monopolies Mergers occur when two or more companies combine to form one company May lead to the creation of even stronger monopolies- if ALL the companies in a particular industry merge, there is no longer any real competition in that industry Another way to create a monopoly is to form a trust- several companies create a board of trustees The companies remain separate businesses, but the board of trustees makes sure the companies don’t compete with each other If all businesses in a particular industry create a trust, there is no longer any real competition in that industry

Monopolies Large companies can buy out smaller companies in the same industry or temporarily lower their prices below their costs Large company lowering its costs would force smaller companies to do the same Large company can afford to operate at a loss for a longer period of time because it has more capital versus the smaller companies Smaller companies can’t afford to operate at a loss for that same time period, so they will go out of business or be forced to merge with the larger company

Importance of Big Business Today, most big businesses face competition from others If a company’s profits are high, other companies seeking profits will try to enter the industry and competition is quickly restored Big businesses are essential to our economy Produce essential goods/services more efficiently than small companies (steel, electricity, automobiles, large machinery) Economies of Scale explain how goods and services can be produced more efficiently by larger companies Few companies account for the production and sales in some industries, but they must still use fair practices

Regulating Monopolies Federal government enforces rules to ensure the U.S. free-enterprise system operates fairly Congress has passed antimonopoly and antitrust laws Antitrust Act of 1890 was passed to prevent monopolies and was strengthened by the Clayton Act of 1914 which forbade practices that would weaken competition Antitrust Division of the U.S. Justice Department and Federal Trade Commission are responsible for enforcing these laws

Regulating Monopolies Conglomerate- merger of businesses that produce, supply, or sell a number of unrelated goods A single conglomerate may control communication systems, insurance companies, hotel chains, and other types of businesses Government closely watches the merging of companies to ensure they don’t gain too much control over an industry and threaten competition In some industries, monopolies are legal- public utilities are companies that provide essential services to public in a certain area Providing such services requires very expensive capital equipment so it would be wasteful for more than one company to provide the same service to one area So one company is allowed to have a monopoly, but under strict government regulation

Comparing Economic Systems Freedom of buyers and sellers and freedom of competition in a market without any government interference represent a free market economy No true free economies exist in the world Command Economy- the government owns almost all capital, tools, and means of production (usually represented by dictatorships or totalitarian governments) Tells the managers and workers what and how much to produce; most all economic decisions are made by the government The U.S economy is free, but the government still controls certain parts of the economy through regulations- U.S. economy is not entirely free so it is a mixed economy Traditional Economy- economy is based on customs and traditions; represented by hunter and gatherer societies Economic roles are passed down by family members or assigned based on age or gender