Chapter 3: The American Free Enterprise System

Section 1: Basic Definition Free Enterprise System is another name for capitalism, and economic system based on private ownership of productive resources. It is “free” in the sense that anyone has the power to start a business or enterprise.

The United States as a Free Enterprise The free enterprise system is seen in all facets of life in the United States. Over half a million business are started on average each year in the U.S. However with this rapid growth there is always risk and a similar number of businesses close each year The goal is to keep this numbered balanced or in favor of opening businesses.

Emerging Free Enterprises In other countries, the government plays a much larger role in controlling who may enter into business. This has limited some economies from growing at the same speed and into the same size as the U.S. but some would argue has minimized the risk factor. Less chance of losing a lot of businesses if the government approved them…at least this is the thought.

Key Vocabulary Open Opportunity: The ability to enter the marketplace at his or her own choice. Legal Equality: Everyone has the same economic rights under law. Free Contract: Voluntary exchange of work. People decide what agreements they will enter. Profit Motive: The incentive to improve products in order to improve business.

An Economist: Milton Friedman What was Friedman’s outlook on the idea of Free Markets? What were his beliefs and how might he respond to the current economic troubles?

Section 2: Allocation of Resources Profit and the seeking of profit is the primary motive and determining factor of how and where producers allocate resources. What are some business examples of this found in section 2?

Government Involvement In reality, we know that the U.S. is a mixed system that involves government regulation in a free enterprise system. Examine the circular flow model on page 80.  Resources and products revolve in a circular flow from households and businesses with resources and capital in between.  The government is in the middle and interacts with all 4 of these parts of the circle in the form of products, investment, and revenue exchange.

Section 3: Role of Government In the U.S. the government provides certain goods and services. This is also known as public goods and are funded by taxes.  Ex. Everything from street lights, to maintaining roadways, to national defense.  An individual who does not contribute to this through taxes is known as a free rider.  An area of shared responsibility between public and private is infrastructure. Mutual interest and mutual benefit involved.

Externalities An externality is a side effect of a transaction that effects other not directly involved. These can both be negative and positive in nature.

Public Transfer Payments The government in a free enterprise also is responsible for creating a safety net for those citizens who are too old or sick to contribute to the economy. A transfer payment is essentially a gift where you are gaining and not giving up anything at all in transaction. A public transfer payment is the same thing but involves your tax dollars so in a way you are paying.