Free Enterprise: Benefits and Growth

Basic Characteristics of Free Enterprise Opportunity Incentives Profit Motive Competition Legal Equality Private Property Rights Economic Freedom

Key Roles in the Free Enterprise System The Role of the Consumer Interest group The Role of the Entrepreneur

Eco Freedom & the Constitution Property Rights 4th Amendment- due process Taxation Article I- right to tax 16th Amendment- income tax Contracts Article 1 Sect. 10- inference with contracts

The Limited Role of Government in the Marketplace Information and Free Enterprise Freedom of Information Act Protecting Public Health, Safety, and Well-Being EPA OSHA Negative Effects of Regulation Hamper competition by in creased costs Increase barriers to entry

The Limited Role of Government in the Marketplace Over time, government has increased its regulation of the economy. Determine Relevance How might the Consumer Financial Protection Bureau help protect the public?

Supporting Economic Growth

THE BUSINESS CYCLE ILLUSTRATED:

Recession/Contractionary Peak temporary maximum in Real GDP. At this point the unemployment rate (u%) is probably below the natural rate of unemployment, and the inflation rate (π%) is probably increasing. Recession/Contractionary The contractionary phase of the business cycle. A period of decline in Real GDP accompanied by an increase in u%. To be classified as a recession, the economic decline must be at least 6 months long. Trough The bottom of the business cycle. The u% is probably high and π% is probably low. Recovery/Expansionary The phase of the business cycle where the economy is returning to full employment.

Four Phases of Business Cycle

THE MEASUREMENT OF GDP Gross domestic product (GDP) is a measure of the income and expenditures of an economy. GDP is the total market value of all final goods and services produced within a country in a given period of time.

Output is valued at market prices. “GDP is the Market Value . . .” Output is valued at market prices. “. . . Of All. . .” Includes all items produced in the economy and legally sold in markets “. . . Final . . .” It records only the value of final goods, not intermediate goods (the value is counted only once). “. . . Goods and Services . . .” It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).

“. . . Produced . . .” It includes goods and services currently produced, not transactions involving goods produced in the past. “ . . . Within a Country . . .” It measures the value of production within the geographic confines of a country. “. . . In a Given Period of Time.” It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).

Tracking the Economy The United States Treasury, shown here, is one of many U.S. government agencies that monitor the economy.

Tracking the Economy Business cycles at one time featured wild swings of growth and decline but have in recent decades settled into a moderate pattern. What has the United States gained—and lost—with the more moderate cycles of recent decades?

Encouraging Economic Strength Because the market is vulnerable to business cycles, the government tries to create public policies that promote economic strength. In general, policymakers today use these tools to promote economic strength by pursuing three main goals: high employment, growth, and stability—stable prices and secure financial institutions.

Encouraging Economic Strength Maximum Employment- 4%-6% A Growing Economy- increase GDP Stability- price level Secure Financial Markets- FDIC Economic Citizenship- referendums and voting

Encouraging Economic Strength This traditional measure of standard of living does not include many measures that might affect people’s quality of life. How might levels of education, poverty, income inequality, and health impact standard of living?

Encouraging Economic Strength The economic crisis of 2008 triggered vigorous debate over government support for the banking industry. Here, citizens clash at a rally protesting the influence of major financial institutions in the United States.

Productivity and the Role of Technology- Encourage sustained economic growth Technological Progress- creation and destruction Encouraging Innovation- patent and copyrights The American Work Ethic

Public Goods and Externalities

Public Goods Shared good that’s inefficient/impractical to make consumers pay individually or exclude those who didn’t pay Financed by the public or private sector Infrastructure Weighing Costs and Benefits Benefit is less than the cost you would pay if it were provided privately Total benefits are greater than the cost Free-Rider Problem- not willing to pay but benefiting from the public good regardless

Public Goods Mail delivery is a service government has provided since the earliest days in the nation’s history. Why do you think the federal government chose to provide this service rather than letting a private company do it?

Public Goods Public goods are created after a cost-benefit analysis like this one.

Market Failures Public goods are examples of what some economists call a market failure. A specific situation in which the free market, operating on its own, does not distribute resources efficiently.

Externalities Out-of-state drivers can travel over roads that they did not pay to have built. Nonpayers as well as payers enjoy the environmental benefits of national parks. Both of these examples involve what economists call externalities. An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume. Externalities may be either positive or negative.

Building the Capp County bridge resulted in positive and negative externalities. Explain how businesses are both helped and hurt by the building of the bridge.

The Poverty Problem This sign announces that shoppers can use an EBT card—food stamps—to pay for their purchases. Food stamps are an example of a government program that redistributes wealth.