Free Enterprise and the American Economy

What is Free Enterprise? Hi, my name is ADAM SMITH, but you can call me the “Father of Free Enterprise” The Wealth of Nations (1776) FYI – The full title was “An Inquiry into the Nature and Causes of the Wealth of Nations”

What is Free Enterprise? “LAISSEZ-FAIRE” = “Allow to act” or hands off, let it be **Government does NOT interfere in the economy** The MARKET determines prices/wages – also called… “THE INVISIBLE HAND”

The Invisible Hand The Invisible Hand is based on the idea that everyone always acts in their own best interest. - Producers will make the products that consumers will buy and in the most efficient way possible. - Consumers will not pay more for a product than it is worth, and suppliers will not charge more than consumers will pay. - Workers will not work for wages that are not fair, so employers will pay them what their labor is worth

The Circular Flow of Money CONSUMERS spend money in PRODUCT MARKETS in exchange for goods and services. Consumers Product Markets

The Circular Flow of Money That money then goes to PRODUCERS who provide those goods and services to be sold. Consumers Product Markets Producers

The Circular Flow of Money Producers use that money in FACTOR MARKETS to get the materials and labor needed to make the product. Consumers Product Markets Factor Markets Producers

The Circular Flow of Money People work in FACTOR MARKETS in exchange for income. They are paid for their labor. They use that money in the product market. Consumers Product Markets Factor Markets Producers

The Circular Flow of Money

Variations on Circular Flow The Government Sector: Federal, State, and Local Gov’t - Receives revenue from taxes as well as services it sells (bus fee, college tuition) - Uses revenue to provide services (schools, libraries) - Also provides jobs(military, teachers, police, etc.), which equals income for households

Variations on Circular Flow

The American Economy The Roles of Government: Government protects CONSUMERS Product safety Price controls Regulate monopolies (fair competition) - Government protects WORKERS Minimum Wage, Maximum Hours (overtime) Workplace standards, Worker’s Compensation Child Labor rules

The American Economy Free Enterprise: People are free to start up a business and run it with little government interference Freedom of Choice Consumers choose what to buy Producers choose what to sell “Consumer Sovereignty” – producers make what people will buy. The consumers rule the market. If people won’t buy it, producers will stop making it. If there is a demand for something, someone will produce it!

The American Economy Private Property: People can own property and build on it People can buy and sell their property Government cannot take your property without compensating you for it, and it has to be for a public purpose… Eminent Domain (5th Amendment)

Profit = Revenue – Costs The American Economy Profit Incentive The reason to start a business is to make money (profit) Profit = Revenue – Costs The amount you earned from selling the good or service minus the money you put in to providing it Monthly revenues selling pizza: $15,000 Fixed Costs (rent, machines): $2,000 Labor: $7000 Variable Costs (resources): $2,000 PROFIT: ??

The American Economy Competition Companies compete with each other to sell products Benefits to the Consumer: Higher Quality Lower Prices More Choices Other “Incentives” Importance of advertising!