American Free Enterprise Chapter 3

What are the benefits of a free enterprise society? Essential Question What are the benefits of a free enterprise society?

Essential Question Think of a product that you use that was developed or modified as a result of some change in the marketplace. Would this product have been developed in a command economy? Why or why not? How does this product demonstrate a strength of the free enterprise system?

Guiding Question How does the American economy incorporate the main characteristics of a free enterprise economy?

I. Advantages of Free Enterprise System U.S. is a capitalist economic system This is all based on private ownership of the four factors of production Consumers are free to choose what they buy, producers are free to make what they like, and make as much profit as possible.

How Free Enterprise Works Free Enterprise is just another name for capitalism You are free to start a business that provides usefulness to consumers Business is free to use scarce resources as they please Managers and workers operate these businesses in exchange for pay

Consumers decide what they want to buy They look for goods and services to fulfill wants for the best possible value

What are the weak points of the free enterprise economy? Guiding Question What are the weak points of the free enterprise economy?

Limits of Free Enterprise Gov’t only limits free enterprise in small ways ex. Can’t take advantage of consumers with unsafe products Some emerging nations using free enterprise set more limits Ex. Make companies offer the same benefits

Five Freedoms of Free Enterprise 1. Right to Private Property- ability to own your own land, thoughts, and material items. 2. Open Opportunity- Anyone can take part in the market by free choice. Ex. No one can tell you that you can’t open a deli. This creates a wide range of goods and services to choose from. Forces all business to be productive and efficient.

3. Legal Equality- Everyone in the economy is protected by same economic rights under law. Everyone has the right to succeed or fail. 4. Free Contract- People choose which agreements to enter into in the market place ex. Buying a house and agreeing to pay a mortgage

5. Profit Motive- force that encourages people to improve their wealth through economic activity Ex. You decide to open a Sheetz on Route 30 to become wealthier

Competition in Free Enterprise Drives prices down to offset people true ambitions to make as much money as they can It creates reasonable prices for the consumer, but still leads to profit Ex. Gas Station Wars

II. How Does Free Enterprise Allocate Resources? Consumers are looking to get the best value of a good or service for their buck Producers as looking to make as much profit as possible Profit- Money left over after paying for production costs Revenue-Bills=Profit Revenue- Money made from selling a good or service

By trying to earn profit producers help to allocate resources Allocate- to set aside or locate scarce resources We allocate our money or set it aside to fulfill wants that we feel are most important. Gas, Bills, Food

Ex. Seeking Profit Convenience Stores They charge a reasonable yet higher price on their products By convenience store A making profit, it will motivate Timmy to open his own store People allocate resources to places they know they will make money

Resources are now being allocated (set aside) for convenience stores instead of another area This creates competition and variety in the economy

Consumers Also Allocate Resources When you buy a product you are choosing it over another This helps to influence what producers will make and provide

Ex. Popularity of Energy Drinks Ten years ago they were not in demand Now even the largest soft drink companies are making them due to popularity Coke and Pepsi allocated their resources and put more money into making energy drinks.

Questions What other trends have taken place in society where a new product causes companies to reallocate their resources into a new product? How does a free enterprise system keep their from being to many conveniences stores in a market?

III. Role of Gov’t In Our Economy Our Gov’t plays a limited role in regulating our economy We call this modified free enterprise Refer to Circular Flow Model of Gov’t Interaction in economy

Federal, State, and Local Gov’t takes tax dollars from individuals, businesses, and provides services ex. Military, Social Security, Prints Money, Maintains Roads Product and Factor Markets provide resources for gov’t to use to operate Ex. Gov’t workers, computers, land Federal gov’t employs less workers, but spends way more $ to operate

Section 3- Gov’t and Free Enterprise Economic Decisions are made by buyers and sellers, this is called the free enterprise sector of the economy

Public and Free Enterprise Sector Public Sector- delivery and services by and for the gov’t ex. Military, Social Security Free Enterprise Sector- makes a good or a service if all costs and benefits go to the buyer and seller ex. Ford Motor Co.

All of the goods and services provided by the gov’t in public sector are funded by taxes Ex. Street lighting system These public goods can’t be taken away even though you don’t pay directly for them.

Example You do not pay a usage fee for street lights every time they come on. Yet, everyone is able to benefit from them. Your tax dollars pay for the lights

Public Sector Example Military Everyone benefits from protection Your protection does not take away from others protection

Taxes They are used to ensure that one person does not pay for military services or other public goods. They are used to make sure all people contribute towards public goods in some way It would be impossible to charge individually for all of these public services

Gov’t collects taxes to prevent free riders from taking advantage of public goods and services without paying Ex. Fireworks Display, It would be impossible to charge everyone who could see them to pay for them. So city takes the money out of tax dollars

Example of Free Riders Living on a hippie commune

Public and Private Sectors Share Responsibilities Private Sector- Businesses looking to make profit ex. Pat’s Market Public Sector- gov’t goods and services Ex. Paying a toll on the turnpike Highway is built with some federal and state money The rest of the highway we pay for in tolls

Most infrastructure, mass transit, highways, water and sewer, is funded by both the private sector- citizens and the public sector- gov’t

Managing Externalities Externality- side effect that affects someone other than buyer or seller Negative Externality- imposes costs on people who were not involved Ex. First Energy and the Black Rain in Shippingport

Positive Externality This creates benefits for people who were not involved with economic activity Ex. I build a tire factory in Hookstown. It will create jobs, bring in other businesses, and increase home values Gov’t works to increase these positive externalities

Gov’t Subsidies Gov’t provides money to help cover the cost of an economic activity that may help lots of people. Ex. Gov’t provides subsidies to open a free health clinic. It would benefit a whole community What would be another example of a community benefit through subsidy money?

Public Transfer Payments Gov’t also helps the sick, elderly, and poor in tough times Gov’t provides safety net programs to protect people from economic hardship Ex. Welfare, Social Security, Grants

Poverty in America A family of four making less than $20,000 a year live below poverty level 12% of U.S. pop Some families are poor for along time, but most move in and out of poverty over the years

Transfer Payments Gov’t works to create jobs and helps through transfer payments- Transfer of income from one person or group to another even though the payer receives nothing in return

Private and Public Transfer Payments Private Transfer Payments- this could be help from a family, friend, or charity Public Transfer Payment- comes from the gov’t using tax dollars that you don’t have to pay back. Ex. Welfare, Social Security, Unemployment