1. Sec. 1 – Benefits of Free Enterprise, pp. 51-55
Economics - Chapter 3
Sec. 1 – Benefits of Free Enterprise, pp

2. Profit Motive
The force that encourages people and organizations to improve their material well-being

3. Open Opportunity
The concept that everyone can compete in the marketplace

4. Private Property Rights
The concept that people have the right and privilege to control their possessions as they wish

5. Free Contract
The concept that people may decide what agreements they want to enter into

6. Voluntary Exchange
The concept that people may decide what and when they want to buy and sell

7. Competition
Rivalry among sellers to attract customers while lowering costs

8. Interest Group
A private organization that tries to persuade public officials to act or vote according to the group members’ interests

9. Public Interest
The concerns of the public as a whole

10. How does the Constitution protect (which underlies) the American free enterprise system?
The Const. guarantees rights to engage in business activities.
Fed gov’t cannot take people’s private property
Fed. gov’t cannot interfere in private contracts
Constitution controls levying taxes

11. Explain three benefits of the free enterprise system.
An open opportunity for all to compete in the marketplace
The production of a variety of goods and services
Buyers and sellers can decide what will be produced

12. Explain your role as a consumer and how you influence the economy.
Decisions to buy or not to buy an item affects the variety, quantity, and quality of goods produced.
Without purchases, the economy fails to thrive

13. Major Federal Regulatory Agencies
Year Created * Agency
What does the agency do?
1908 * Food & Drug Administration (FDA)
Sets & enforces standards for food, drugs, and cosmetic products
1914 * Federal Trade Commission (FTC)
Enacts and enforces antitrust laws to protect consumers
1934 * Federal Communications Commission (FCC)
Regulates interstate and international communications by media.
1958 * Federal Aviation Administration (FAA)
Regulates civil aviation, air traffic, and piloting standards, and air commerce
1964 * Equal Employment Opportunity Commission (EEOC)
Promotes equal job opportunity through enforcement of civil rights laws, education, and other programs
1970 * Environmental Protection Agency (EPA)
Enacts policies to protect human health and the natural environment
1970 * Occupational Safety and Health Administration (OSHA)
Enacts policies to save lives, prevent injuries, and protect the health of workers
1972 * Consumer Product Safety Commission (CPSC)
Enacts policies for reducing risks of harm from consumer products
1974 * Nuclear Regulatory Commission (NRC)
Regulates civilian use of nuclear products

14. Alice Rivlin What is the Congressional Budget Office?
Federal agency that helps Congress understand government spending issues

15. President Bill Clinton appointments of Alice Rivlin . . .
1993: Director of the Office of Management and Budget (OMB)
1996: Federal Reserve Board (until 1999)

16. What does Alice Rivlin believe encourages growth more than cutting taxes?
She believes programs that increase over productivity, like technology, transportation, communications, and education are a better approach to growth than cutting taxes.

17. Alice Rivlin argues that
Aid for business should come from
The State, where a better knowledge of specific needs exists.

18. Explain why you agree or disagree with Rivlin’s opinion about lowering taxes.

19. Promoting Growth and Stability
Economics – Ch. 3, Section 2
Promoting Growth and Stability

20. Macroeconomics
The study of the behavior and decision making of entire economies

21. microeconomics
The study of the economic behavior and decision making of small units, such as individuals, families, and businesses

22. GDP (Gross Domestic Product)
The total value of all final goods and services produced in a particular economy

23. Business Cycle
A period of macroeconomic expansion followed by a period of contraction

24. Work Ethic
A commitment to the value of work and purposeful activity

25. technology
The process used to produce a good or service

26. How does GDP provide a means to analyze economic growth?
A strong GDP reflects a healthy economy; a healthy economy is the result of a well-functioning free enterprise system.

27. Give one example of a new technology that has resulted in greater productivity in the United States.
Telephones
Railroads
Automobiles
computers

28. How do patents and copyrights promote innovation?
Patents provide inventors the exclusive right to market their products for a set period.

29. Copyrights provide licenses for authors or artists to market their creative works
Both patents and copyrights give innovators economic incentives to produce new products
copyright

30. How does innovation help the economy?
Innovation helps the economy by leading to greater productivity.

31. Key Terms *Questions, Ch 3, Sec. 3
Providing Public Goods

32. Public Goods
A shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers

33. Private Sector
The part of the economy that involves the transactions of individuals and businesses

34. Free Rider
Someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good

35. Market Failure
A situation in which the market does not distribute resources efficiently

36. Markets can fail because of:
Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost.
Positive (or beneficial) externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit
Imperfect information means merit goods are under-produced while demerit goods are over-produced or over-consumed
The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people’s needs and wants
Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition
Factor immobility causes unemployment hence productive inefficiency
Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change

37. externality
An economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

38. Why is a free rider a type of market failure?
Free riders are market failures because they involve people consuming public goods and services for which they have not paid. This is not efficient distribution of goods

39. Questions, Ch 3, Sec. 4
Providing a Safety Net

40. Poverty Threshold
An income level below that which is needed to support families or households

41. Welfare
Government aid to the poor

42. Cash Transfers
Direct payments of money to eligible poor people

43. In-Kind Benefits
Goods and services provided for free or at greatly reduced prices

44. What is the difference between cash transfers and in-kind benefits?
Cash transfers provide people with direct payments of money. In-kind benefits provide goods and services free or at reduced cost.

45. How is Social Security an example of income redistribution?
The Social Security Administration taxes a portion of citizens’ income while they are working and redistributes it to the nation’s elderly and the disabled.

46. Pg. 71, “Government and the Interstate Highway System”
Why was it inefficient to leave highway construction to individual states?
Individual state highway numbering systems varied, and these highways did not always connect between states

47. Why do you think it took Congress so long to authorize funds for highway construction?
Congress believed it was the states’ job to construct the roads and that it would be an overextension of congressional power to do it on the federal level.

48. What kind of externality?
negative

49. TANF (Temporary Assistance for Needy Families) provides . . .
Cash to the States to run the State welfare programs
Notes:
Difference between a business cycle and the day-to-day ups and downs of the market?
Business cycle is a major, prolonged fluctuation

50. Critical rule for determining whether something is a PUBLIC GOOD?
Notes:
Benefits to TOTAL SOCIETY is greater than the total cost
EXAMPLES of PUBLIC GOODS
Highways, municipal libraries, national parks. public sidewalks, etc
NOT a shopping mall !

51. SOCIAL SECURITY provides
OSHA (Occupational Safety and Health Administration) – Federal Agency that is . . .
Notes:
Enforces safety and health laws for the workplace
SOCIAL SECURITY provides
Income for the elderly and some survivors; some disabled persons and their dependents

52. Why does government make businesses disclose information?
Notes:
To make buyers more knowledge-able and safer
What is a positive externality?
A beneficial economic side effect

53. Free Rider
Notes:
One who consumes a good or service, but does not pay