Lecture #8: Free Enterprise Part 1

How does Free Enterprise answer the 3 economic questions? What goods will be produced? In a free enterprise economy, business firms produce goods that consumers want to buy. Example: Ford and General Motors make cars that people are going to buy. If no one is buying it they get rid of it! Remember when taking Cornell Notes you need to come up with at least 3 questions per page!

How does Free Enterprise answer the 3 economic questions? (cont) How will these goods be produced? The individuals who own & manage the business firms decide how goods will be produced.

How does Free Enterprise answer the 3 economic questions? (cont) For whom will the goods be produced? Goods are produced for people who are both willing and able to buy them.

5 Features of Free Enterprise 1. Private Property Any good that is owned by an individual or a business. Ex: car, house, piece of machinery Any good the govt owns is public property Eminent domain—govt can take ownership of private property w/out consent of the owner if they need it. They pay for the land & use it to build schools, highways, & govt buildings

5 Features of Free Enterprise (cont) 2. Freedom of Choice Workers have the right to choose what work they want to do & whom they will work for Businesses have the right to choose the products they will produce & sell Buyers have the right to choose what they will buy

5 Features of Free Enterprise (cont) 3. Voluntary Exchange Individuals have the right to make exchanges or trades that they believe will make them better off! Ex: The trade activity we did! Ex: Trading $10 cash for a book is an example of voluntary trade.

5 Features of Free Enterprise (cont) 4. Competition Consumers benefit from competition between sellers Workers benefit from competition when it results in higher wages Ex: Sale items at stores Ex: Pro-Athletes who make millions more for going with one team compared to another!

5 Features of Free Enterprise (cont) 5. Economic Incentives Money acts as an incentive to produce. If you produce goods & services that people are willing to buy, you get MONEY!!!

The Circular Flow Circular Flow The economic relationships that exist between different economic groups in an economy. Draw the following diagram in your notes!

The Circular Flow (cont) Households buy goods from businesses & sell resources to businesses Both businesses & households pay taxes to the govt Both businesses & households receive benefits from the govt (roads, schools, national defense)

Profit & Loss in Free Enterprise The amount of money left over after all the costs of production have been paid. Profit exists whenever total revenue—(the price of a good times the number of units of the good sold) is greater than the total cost—(the average cost of a good times the number of units of the good sold). A loss occurs when the total cost exceeds total revenue.

Profit & Loss in Free Enterprise (cont) You sell 10 CD players at $100 each—What is your total revenue? (Price of a good X Number of units sold) $1000 ($100 X 10 = $1000) If it costs you an average $70 to make each CD player, how much does it cost to produce 10? (Average cost of a good X Number of units sold) $700 ($70 X 10 = $700) Do you have a profit or a loss on your sale of 10 CD players? You show a profit of $300 because your total revenue $1000 is greater than your total cost $700 (Profit = Total Revenue >Total Cost)

Profit & Loss as “Signals” Profits & Losses are: Signals to the firms actually earning the profits or taking the losses, and A firm may discontinue a product that is producing a loss Signals to firms standing on the sidelines. A firm on the sideline sees what product is profitable & decides whether or not to enter the market

Review—True or False In a free enterprise system, businesses are free to choose which goods to produce. TRUE Any good owned by the government is referred to as a public good. In a free enterprise system, there is competition for your labor. Under free enterprise, money is an incentive to produce.

Review—True or False Total Revenue is the average cost of a good divided by the number of units the good sold. FALSE Resources flow toward losses. When total cost is greater than total revenue, there is a loss. TRUE Profit is the price of a good times the number of units of the good sold. Goods that earned profits in the past always earn profits in the future.

Summary When completing your notes you need to write a 3-5 sentence summary of the lecture. This is a part of your notes grade!

Globalization Collage (30 points) Create a collage about globalization. It has to be at least the size of a piece of computer paper. You can create it on the computer and print it out or you can cut and paste. Find at least 3 visual examples for each sub-topic (ex: Globalization—Global Corporations) Each visual is worth 1 point! Globalization (definition 5 points) Offshoring (definition 5 points) Global corporations Positives Negatives Companies that offshore