1. The American Free Enterprise System
Chapter 3

2. What is a Free Enterprise System?
Capitalism also known as free enterprise system

3. What is a Free Enterprise System?
EXAMPLE: United States
Businesspeople free to start business, choose how to use resources
Private ownership of the factors of production
Managers and workers choose where to exchange labor for pay
Consumers choose which goods and services to buy
Government protects or encourages competition, enforces contracts
Profit motive—incentive to gain from economic activities

4. Emerging Markets
Most countries have some mix of tradition, free enterprise, government involvement
Mexican government regulations make starting a business difficult
street vendors get around rules; have driven out some retail stores
Singapore government keeps business costs low but is very involved
requires employers pay benefits; workers pay into national fund

5. Characteristics of Free Enterprise

6. How a Free Enterprise System Works
EXAMPLE: 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. How a Free Enterprise System Works
EXAMPLE: 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. New Products In a small group develop a new fad product.
Write an exciting description of your product.
What wants and / or needs is your product designed to fulfill?
What are the risks and rewards of starting production?
Be ready to share!

9. The Roles of Producers and Consumers
How Does Free Enterprise Allocate Resources?
The Roles of Producers and Consumers
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

10. Producers and Consumers in Free Enterprise
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, consumers have directed the allocation of resources

11. Producers and Consumers in Free Enterprise
Consumers Vote with Their Wallets
Consumers help allocate resources through their choice of products
their choices guide producers to provide what consumers will buy
Example: 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

13. Government in the U.S. Economy
Government important but with limited role in U.S. economy
Modified free enterprise economy:
government protections, provisions, regulations adjust pure capitalism

14. Government in the U.S. Economy
Modified Free Enterprise
The government is producer and consumer
buys factors of production in resource market
buys products in product market
provides goods and services to businesses, households
uses axes to pay for resources & products

16. Try This
Create a graphic that shows the cause- and-effect interactions of consumers and producers in allocation resources in a market economy.
Use illustrations and pictures whenever possible.

17. Activity
VE – Basics of a Market Economy

18. Government and Free Enterprise
In a modified free enterprise system the government interacts in the market to protect the rights of consumers and producers.

19. Providing Public Goods
Public goods are provided by the government and consumed by the public.
Characteristics of Public Goods
people who do not pay cannot be excluded
one person’s use does not make product less useful to others (shared consumption)
EXAMPLES: Street lighting, national defense
impossible to determine price or benefit per user

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

21. Providing Public Goods
Public and Private Sectors—Shared Responsibilities
Some goods provided by either public or private sector
toll goods—consumed by public but people can be excluded
often initial funding public, daily operations private
Infrastructure—goods and services needed for society to function
examples: highways, mass transit, water, sewer, health care, fire

22. Externalities Market interactions can cause externalities.
Externality—side effect on someone other than producer or buyer
Externalities can be positive or negative

23. Externalities EXAMPLE: 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

24. Externalities EXAMPLE: 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

25. Public Transfer Payments
Free enterprise has some problems
people unable to contribute cannot access economic opportunities
Safety net—government programs designed to protect people from economic hardship

26. Public Transfer Payments
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

27. Public Transfer Payments

29. Case Study: The United States: Land of Entrepreneurs
Background
The free enterprise system and the belief that everyone has the right to pursue economic success is the backbone of American society
Although many people achieve success by working for an employer, an increasing number are working for themselves
What’s the Issue?
What are some of the options for opening your own business?

30. Case Study: The United States: Land of Entrepreneurs {continued}
Thinking Economically
How do the legal rights built into the free enterprise system affect the businesses in A and C?
Which of these two businesses do you feel would provide more stability for its owner? Why?
Do you think entrepreneurs make up a large percentage of the work force? Why are entrepreneurs important to the economy?

31. Possible Chapter Resources
P. 79 Resource Manager
NCEE – Gov’t resource allocation
Econ Alive – ch 11, How should the U.S. Government carry out its role?
Resource Manager
P. 155 Gov’t decisions in free enterprise
P. 161 Business in free enterprise
VE – When Markets Fail