1. Chapter 3 THE AMERICAN FREE ENTERPRISE SYSTEM

2. Key Concept  Free enterprise system is another name for capitalism. This name is used because anyone is free to start a business or enterprise.  Free enterprise affects your day-to-day life. It is all around you, from huge suburban shopping malls to industrial developments to office buildings to neighborhood corner stores. Where you work, where you shop, and what you buy are all influenced by the free enterprise system.

3. What is a Free Enterprise System?  Capitalist system also known as free enterprise system  — anyone is free to start a business or enterprise  — private ownership of factors of production

4. Example United states  Businesspeople free to start business, choose how to use resources  Managers and workers choose where to exchange labor for pay  Consumers choose which goods and services to buy  Zalia Cosmetics—2001 startup aimed at underserved Latina market  Government protects or encourages competition, enforces contracts

5. Key Terms  System gives right to own and exchange private property voluntarily  Open opportunity—ability to enter, compete in market of one’s choice  Legal equality—everyone has same economic rights under the law  Free contract—right to decide which legal agreements to enter into  Profit motive—incentive to gain from economic activities

6. Profit in Rocks  1975 pet rock fad; packaged with care manual  — highly popular and profitable gag gift during holiday season  In early 1976, consumers stopped buying  — owner quit the business

7. Competition Over Books  Demand for books high; competition driving out small booksellers  Before 1995, small chain stores and independents dominant  1995, large chains offered discounted prices, appealing atmosphere  1995, online booksellers open with huge number of titles, low prices  small stores now offer personal service, local or specialized topics

8. Group activity  Create 4- part project that explains an idea for a product to compete with an existing product.  Part 1: is description of the existing product  Part 2: is description of your competing product (note same details about the new product as they did for the original)  Part 3: explaining why your product will be a better value to the customers than the original  Part 4: explain why competition is an essential part of a free enterprise

9. Milton Friedman  Professor—thinks market should be free to operate in all fields  Thinks government’s key role is to control money supply, thus inflation  Served as advisor to two U.S. presidents, foreign heads of state  Won 1976 Nobel Prize for Economics  Recent years, scholar, has foundation promoting educational freedom

10. Review  Explain the differences among the following terms:  open opportunity  legal equality  free contract  Also include how this was relevant to the entrepreneur you chose to research.

11. Discussion Questions Section 1  What is the role of the profit motive in the American free enterprise system?  How is a free enterprise system linked to economic freedom?  What force acts as a balance to the profit motive in the American enterprise system?

12. The Roles of Producers and Consumers (Section 2)  Consumers try to get the best deal for their money  Producers try to earn the most profits  Profit—money left after production costs subtracted from sale price

13. Producers Seek Profit  Neighborhood coffee shop shows how producers help allocate resources  to earn profits, charge highest price consumers will pay  profits encourage others to open similar businesses  result: productive resources directed toward coffee shops

14. Consumers Vote with Their Wallets  Consumers help allocate resources through their choice of products  — their choices guide producers to provide what consumers will buy  Early 2000s, low-carbohydrate diets became popular  — food producers moved some resources into low-carb market  — In 2004, producers cut back when consumer interest faded

15. Modified Free Enterprise Economy  Government important but with limited role in U.S. economy  Modified free enterprise economy:  — government protections, provisions, regulations adjust capitalism

16. Modified cont.  Like businesses and households, government is producer and consumer  — as consumer, buys factors of production in resource market  — as consumer, buys products in product market  — as producer, provides goods and services to businesses, households  — collects taxes in payment, uses these to pay for resources, products

17. Discussion Question  Why is the U.S. economy sometimes referred to as a modified free enterprise system?

18. Government and Free Enterprise (section3 )  Key Concepts  Public sector—branches of government that make production decisions  Market failure—outsiders benefit from or pay for marketplace interaction  Public goods—products provided by government, consumed by public  Public goods funded with taxes

19. Providing Public Goods  Two characteristics of public goods  — people who do not pay cannot be excluded  — one person’s use does not make product less useful to others  Street lighting, national defense examples of public goods  — impossible to determine price or benefit per user

20. Free Riders  No incentive for business to produce public goods—people will not pay  Free rider—person who benefits but does not pay for good or service  Only way to have public goods is for government to fund with taxes  — examples: July 4 fireworks, law enforcement

21. Managing Externalities  Market failure occurs when economic transactions cause externalities  Externality—side effect on someone other than producer or buyer  — negative externality—people uninvolved in the transaction pay costs  — positive externality benefits people uninvolved in transaction

22. Paying for Negative Externalities  Factory owners—little incentive to pay to cut industrial pollution  People of region pay cleanup cost, have illnesses and medical bills  Government limits negative externalities through taxes and fines  — offset medical costs, provide incentives to reduce pollution

23. Positive Externalities  A new college benefits local businesses, community as whole  Government tries to increase positive externalities  Subsidy—government payment to help cover cost of economic activity  — subsidy to drug company to make flu vaccine yields fewer sick people

24. Public Transfer Payments  A limitation of free enterprise:  — people unable to contribute cannot access all economic opportunities  Safety net—government programs designed to protect people from economic hardship

25. Redistributing Income  Transfer payments move income from person or group to another  — recipient does not provide product in return  Public transfer payment—made by government with tax money  Most public transfer payments in area of social spending  — usually go to poor, aged, disabled, or people who lose their jobs