1. Free Enterprise and the
American Economy

2. What is Free Enterprise?
Hi, my name is ADAM SMITH, but you can call me the “Father of Free Enterprise”
The Wealth of
Nations (1776)
FYI – The full title was
“An Inquiry into the Nature and Causes of the Wealth of Nations”

3. What is Free Enterprise?
“LAISSEZ-FAIRE” =
“Allow to act” or hands off, let it be
**Government does NOT interfere in the economy**
The MARKET determines prices/wages – also called…
“THE INVISIBLE HAND”

4. The Invisible Hand
The Invisible Hand is based on the idea that everyone always acts in their own best interest.
- Producers will make the products that consumers will buy and in the most efficient way possible.
- Consumers will not pay more for a product than it is worth, and suppliers will not charge more than consumers will pay.
- Workers will not work for wages that are not fair, so employers will pay them what their labor is worth

5. The Circular Flow of Money
CONSUMERS spend money in PRODUCT MARKETS in exchange for goods and services.
Consumers
Product Markets

6. The Circular Flow of Money
That money then goes to PRODUCERS who provide those goods and services to be sold.
Consumers
Product Markets
Producers

7. The Circular Flow of Money
Producers use that money in FACTOR MARKETS to get the materials and labor needed to make the product.
Consumers
Product Markets
Factor Markets
Producers

8. The Circular Flow of Money
People work in FACTOR MARKETS in exchange for income. They are paid for their labor. They use that money in the product market.
Consumers
Product Markets
Factor Markets
Producers

9. The Circular Flow of Money

10. Variations on Circular Flow
The Government Sector: Federal, State, and Local Gov’t
- Receives revenue from taxes as well as services it sells (bus fee, college tuition)
- Uses revenue to provide services (schools, libraries)
- Also provides jobs(military, teachers, police, etc.), which equals income for households

11. Variations on Circular Flow

12. The American Economy The Roles of Government:
Government protects CONSUMERS
Product safety
Price controls
Regulate monopolies (fair competition)
- Government protects WORKERS
Minimum Wage, Maximum Hours (overtime)
Workplace standards, Worker’s Compensation
Child Labor rules

13. The American Economy Free Enterprise:
People are free to start up a business and run it with little government interference
Freedom of Choice
Consumers choose what to buy
Producers choose what to sell
“Consumer Sovereignty” – producers make what people will buy. The consumers rule the market. If people won’t buy it, producers will stop making it. If there is a demand for something, someone will produce it!

14. The American Economy Private Property:
People can own property and build on it
People can buy and sell their property
Government cannot take your property without compensating you for it, and it has to be for a public purpose…
Eminent Domain (5th Amendment)

15. Profit = Revenue – Costs
The American Economy
Profit Incentive
The reason to start a business is to make money (profit)
Profit = Revenue – Costs
The amount you earned from selling the good or service minus the money you put in to providing it
Monthly revenues selling pizza: $15,000
Fixed Costs (rent, machines): $2,000
Labor: $7000
Variable Costs (resources): $2,000
PROFIT: ??

16. The American Economy Competition
Companies compete with each other to sell products
Benefits to the Consumer:
Higher Quality
Lower Prices
More Choices
Other “Incentives”
Importance of advertising!