ECONOMIC SYSTEMS & DECISION MAKING (PART THREE)

CHARACTERISTICS OF FREE ENTERPRISE CAPITALISM A capitalist free enterprise economy has five important characteristics: (1) economic freedom, (2) voluntary exchange, (3) private property rights, (4) the profit motive and (5) competition.

ECONOMIC FREEDOM Economic freedom means that you have the freedom to choose your occupation, your employer and your job location.

VOLUNTARY EXCHANGE This is the act of buyers and sellers freely and willingly engaging in market transactions which benefit both buyer and seller.

PRIVATE PROPERTY RIGHTS Private property rights allow people to own and control their possessions as they wish. Private property gives people the incentive to work, save and invest.

PROFIT MOTIVE Profit is the extent to which persons or organizations are better off financially at the end of a specific period than they were at the beginning. The profit motive is the incentive that encourages people and organizations to improve their material well being. It is what powers the free enterprise system.

COMPETITION Capitalism thrives on competition. This is the struggle among sellers to attract consumers. It is possible because entrepreneurs have the freedom to produce the products they believe will be most profitable.

CONSUMER SOVEREIGNTY Consumers have power because they ultimately determine which products are produced. Consumer Sovereignty recognizes the role of the consumer as sovereign or ruler of the market.

GOVERNMENT’S ROLE IN THE MARKETPLACE:

GOVERNMENT IS A PROTECTOR The U.S. Government enforces laws such as those against false and misleading advertising, unsafe food and drugs, environmental hazards, and unsafe automobiles.

GOVERNMENT IS A PROVIDER All levels of government provide goods and services for its citizens. Justice and national defense are two examples. Government provides subsidies for agriculture and infrastructure as well as other forms of funding for state and local governments.

GOVERNMENT IS A REGULATOR In its role as a regulator, the national government is charged with preserving competition in the marketplace. It also oversees communications, interstate commerce, and entire industries such as banking and nuclear power.

GOVERNMENT AS A CONSUMER To satisfy these roles, government is also a consumer of the scarce resources necessary to fulfill its responsibilities. Government has eclipsed private spending in the economy and is now the second largest consuming unit in the economy after the consumer sector.

MODIFIED FREE ENTERPRISE An unintended consequence of government’s role as protector, provider, regulator and consumer is the emergence of the mixed or modified free enterprise system. In this system, people and businesses carry on their economic affairs, but are subject to some government intervention and regulation.