1. U1C3: The American Free Enterprise System
Economics

2. Main Idea
Free Enterprise System is another name for capitalism, an economic system based on private ownership of productive resources. This name is sometimes used because in a capitalist system anyone is free to start a business or enterprise.

3. Essential Question
What is the American free enterprise system and what is the government’s role in it?

4. 1. Advantages of the Free Enterprise System
economic system based on private ownership of production resources
called free enterprise system because in it anyone is free to start a business or enterprise
Free Enterprise
profit motive is incentive for starting a new business
key features: open opportunity, legal equality, free contract

5. What Is a Free Enterprise System?
Capitalist system is known as a free enterprise system because anyone is free to start a business or enterprise
Capitalism is an economic system based on private ownership of the factors of production
The central idea of capitalism is that producers are free to produce the goods and services that consumers want
Consumers buy goods and services that satisfy their economic wants
Producers are influenced by the desire to earn profits
Focus #1 Why is the United States is considered to have a capitalist or free enterprise system?

6. How a Free Enterprise System Works
The right to private property is one of the most fundamental freedoms in a capitalist economy, with that right comes the right to exchange property voluntarily, an exchange that lies at the heart of a free enterprise economy
EXAMPLE: Pet Rocks-Gary Dahl created a fad that made him rich; once the fad died he got out of that business
EXAMPLE: Books- small bookstores shutdown by large retailers which have been shutdown partially by amazon.com which has been seeing competition from overstock.com, all of which is good for consumers
Focus #2 How does the profit motive and competition help to make the free enterprise system work?

7. What legal rights are built into the free enterprise system?
Open Opportunity: everyone should have the ability to enter and compete in any marketplace. Open participation serves as an incentive to be efficient and productive
Free Contract: everyone should have the right to decide for themselves which legal economic agreements they want to enter into. Voluntary exchange, a cornerstone of free enterprise, cannot function without freedom of contract
Focus #3: What are the legal rights that safeguard the free enterprise system?
Legal Equality: everyone should have the same economic rights under the law. In other words, the law should not give some people a better chance than others to succeed in the marketplace

8. 2. How Does Free Enterprise Allocate Resources?
Profit
consumers vote with their wallets
producers seek profit
government acts as producer and consumer

9. The Roles of Producers and Consumers: Key Concepts
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
Example: 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

10. The Roles of Producers and Consumers: Key Concepts (continued)
Example: 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
-2004, producers cut back when consumer interest faded

11. Government in the U.S. Economy
KEY CONCEPTS
Government important but with limited role in U.S. economy
Modified free enterprise economy
-government protections, provisions, regulations adjust capitalism
MODIFIED FREE ENTERPRISE
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

12. 3. Government and Free Enterprise
providing public goods:
Characteristics
Free riders
managing externalities:
who pays for negatives
how positives are spread
Government
public transfer payments:
providing safety net
redistributing income

13. Providing Public Goods
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

14. Example: Characteristics of 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

15. Example: 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

16. 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

17. Managing Externalities
KEY CONCEPTS
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

18. Example: Negative and Positive Externalities
Example: Paying for negative externalities-
Factory owners: little incentive to pay to cut industrial pollution
People of region pay cleanup costs, have illnesses and medical bills
Government limits negative externalities through taxes and fines
-offset medical costs, provide incentives to reduce pollution
Example: Spreading Positive Externalities
A new college benefits local businesses, communities as a 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

19. Public Transfer Payments
KEY CONCEPTS
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

20. 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 payment in area of social spending
-usually go to poor, aged, disabled, or people lose their jobs