1. Topic 2: Free Enterprise and Other Economic Systems

2. Topic Objectives
Students will be able to
Identify the three basic economic questions that all societies must answer
Describe the economic goals that determine how a society answers the three economic questions.
Define the characteristics of a traditional society.
Explain why markets exist.
Explain a circular flow model of a free market economy.
Describe how self-interest and competition lead to the self-regulating nature of the  marketplace.
Identify the advantages of a free market economy.
Describe how a centrally planned economy is organized, including its disadvantages.
Distinguish b/w socialism and communism.
Explain the rise of mixed economic systems.
Explain the basic characteristics of the US free enterprise system.
Describe the role of government in the US free enterprise system.

3. I. The Three Basic Economic Questions
Because resources are scarce, every society must answer three economic questions:
What goods/services should be produced?
How should these goods/services be produced?
Who consumes these goods/services?
The way a society answers these questions defines its economic system.

4. Three Questions… What Goods/ Services to Be Produced?
* Every society must decide what to produce to satisfy needs/wants
* Ex: food, shelter, consumer goods.
* Each decision comes w/ opportunity costs
How Should Goods and Services Be Produced?
* Ex: What fuel use? Oil, solar, nuclear?
* Figure 2.1
* All decisions involve trade-offs

5. Three Questions…
Who Consumes the Goods and Services that are produced?
* Answers to questions are largely determined by how societies distribute income.
* Factor Payments
* Profit

6. I. Three Questions… Economic Goals of Society Efficiency Freedom
Security… safety net
Equity… Figure 2.2
Growth… Standard of Living, Innovation
Conflicting Economic Goals
***Traditional Economies
Which basic economic goals can be achieved easily in a traditional economy? Which cannot?

7. II. Free Markets Why Do Markets Exist? Define: Markets
* Markets eliminate the need for self-sufficient
Role of Specialization
* Leads to efficiency in the use of capital, land, and labor; benefits businesses and specialists
Buying and Selling
* Need a mechanism that allows buying/selling that was produced and buy what they want.

8. II. Free Markets Elements of a free Market Economy
Answers to the 3 ?s are made by voluntary exchange in markets.
Individuals and businesses make their own decisions about what to buy or sell.
Mkt Eco: sometimes called capitalist economies b/c the capital that entrepreneurs invest is a vital part of system.
Role of Households/ Firms: Own f of p & Consume g/s
Role of Factor & Product Markets
FM: firms purchase f of p from households
PM: Household buy g/s that firms produce

9. II. Free Markets How Markets Self-Regulate
Self Interest & Adam Smith/ The Wealth of Nations
Incentives (Motivate) & Competition (Regulates)
Figure 2.5
The Invisible Hand: No central planning or direction
Supply/Demand; Individual Incentives
What does competition among producers in a free market accomplish for consumers?

10. II. Free Markets Advantages of a Free Market
Economic Efficiency: Respond to Mkt Conditions
Economic Freedom: Choice: Consumers & Producers
Economic Growth: S of Living & Innovation
Note: Figure 2.6
Consumer Sovereignty

11. III. Centrally Planned Economies
Features of Central Planning
Also: Command Economy
Def: Govt answers 3 ?s; owns land, capital, even labor
Contrast to a free market system
No free mkt forces of self-interest, incentives, and competition.
No: private property, free mkt pricing, competition, consumer sovereignty
Examples: Communism & Socialism
How is the gun v. butter debate resolved?

12. III. Centrally Planned Economies
Socialism
Range of eco systems/ practices
Allows ownership of some private property
Can be part of democratic system
Communism
Requires revolutionary change: Eco Equity requires central authority
Govt is authoritarian, not democratic
State ownership of f of prod

13. III. Centrally Planned Eco: Socialism v. Communism
Both: even distribution of wealth and centralized control of economic power.
Socialist Countries May be Democratic, but communism always authoritarian… limit individual freedom and require strict obedience
Note: Karl Marx
Worker Exploitation, Unfair Wealth Distribution
What belief did Karl Marx hold about capitalism?
Figure 2.8: Production Goals: Soviet 5 Year Plan

14. III.Centrally Planned Economies
Disadvantages of Central Planning
Economic Inefficiency: No incentive, huge bureaucracy
Lack of Economic Freedom: Society over Individual
Lack of Economic Growth: Innovation Discouraged
Economic Inequity: Eq of Results rarely achieved
Positives: Jobs, Women, Healthcare, New industries
Why do centrally planned economies tend not to be efficient? Who benefits and who suffers most from a centrally planned economy? How?

15. IV. Mixed Economies The Reasons for a Mixed Economy
A. Why Govt Gets Involved
1. Public Needs: Infrastructure, Education
2. Equity: Ex: Child Labor, Equal Pay
3. Protect Property Rights: Physical, Intellectual
4. Ensure Fair Exchanges (contracts)
5. Redistribution of Wealth: 16th A, Mini Wage, SS
Balancing Govt and Eco Freedom
*History…. Role of Policymaking

16. IV. Mixed Economies
II. Circular Flow Model of a Mixed Economy: shows how govt interacts w/ households and businesses

17. IV. Mixed Economies… Circular Flow
Govt Actions in FM: purchase land, labor, capital
Govt Actions in PM: purchase goods, services
Govt Transferring Money: SS, Medicare, Unem, Food Stamps, Vet Benefits

18. IV. Mixed Economies Mixed Economies Today
1. Mixed Eco w/ Heavy Govt Involvement
2. Mixed Eco Tending Toward Free Markets
3. Role of Govt
*Keep order, Provide services, Promote welfare, Protect private property, Some regulations/limitations
4. Overall Economic Freedom: Choices for Consumers/Producers
5. Transition Towards Privatization Can be Difficult
Note: Continuum on Mixed Economies: Figure 2.12

19. V. Benefits of Free Enterprise
A. Basic Characteristics of Free Enterprise
1. Opportunity: Individual
2. Incentives: Self interest: wages, profits, prices
3. Profit Motive: encourages risk, innovation
4. Competition; Open Opportunity: anyone can compete; regulates the market
5. Legal Equality
6. Private Property Rights: Control, Preserve, Protect
7. Economic Freedom: Free Contract, Voluntary Exchange

20. V. Benefits of Free Enterprise
Key Roles in the Free Enterprise System
1. Role of the Consumer
* Sends Signal… Interest Group Involvement
2. Role of the Entrepreneur
* Decides on Resources, Makes Profit
Economic Freedom and the Constitution
1. Property Rights: Eminent Domain; 5th A
2. Taxation: 16th A
3. Contracts

21. V. Benefits D. Limited Role of Govt in the Marketplace
** Constitutional responsibility to protect property rights evolved into actions to promote the public interest.
Information & Free Enterprise
*Public Disclosure Laws; Truth-in-Lending Laws
Protecting Public Health, Safety, and Well-being
*EPA, OSHA
Negative Effects of Regulation
* Rules can be costly to implement: slow eco growth & cut into profit
* Stifle competition and raise prices (ex: tariffs)
* Increase govt spending, bureaucracy: enforce

22. Major Regulatory Agencies
Food and Drug Administration
Federal Reserve System
Federal Deposit Insurance Corporation
Federal Aviation Administration
Environmental Protection Administration
Occupational Safety & Health Administration
Consumer Protection Safety Commission
Nuclear Regulatory Commission
Transportation Security Administration
Consumer Financial Protection Bureau
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23. Important Terms
Macroeconomics: study of economic behavior and decision-making in a nation’s whole economy. Microeconomics: study of economic behavior and decision making in small units (households, firms) Gross Domestic Product: total value of all final goods and services produced annually in a country. Business Cycle: the alternating pattern of periodic expansion and contraction (Figure 2.6) Public Good: shared good or service (infrastructure); financed by the public sector.

24. Enduring Objectives
Because societies answer the key economic questions differently, multiple economic systems have developed.
Competition helps to regulate markets and gives producers incentives to make what consumers want.
Because pure market and pure centrally planned economies have drawbacks, nations tend to have mixed economies.
Under the American free enterprise system, the government preserves economic freedoms while protecting the public interest through limited regulation of the economy.