Free Enterprise

How does Free Enterprise answer the 3 Economic Questions? 1.What goods will be produced? sellers decide: what are consumers willing and able to purchase? 1.How will these goods be produced? producers decide 1.For whom will the goods be produced? for those willing and able to buy

5 Characteristics of Free Enterprise Systems private property – any good that is owned by an individual or a business public property-owned by the government

5 Characteristics of Free Enterprise Systems Choice buyers sellers workers investors ? ? ?

5 Characteristics of Free Enterprise Systems Voluntary exchange people can exchange what they value less for what they value more people can exchange what they value less for what they value more people are free to contract and negotiate people are free to contract and negotiate

5 Characteristics of Free Enterprise Systems Competition producers compete for consumers by making better products and/or reducing price. businesses compete for better workers with higher wages workers compete for jobs by accepting lower wages or by offering better skills

5 Characteristics of Free Enterprise Systems economic incentive money acts as an incentive people are inspired to work and create businesses in the hopes of making money. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own self-interest” Adam Smith

“the invisible hand”- free market An Inquiry into the Nature and Causes of the Wealth of Nations Free markets will guide the most efficient and just distribution of goods and services, providing the most benefit to the most people. influences the U.S. founders Adam Smith

Profit- Money left over after paying for production costs Revenue- Bills=Profit Revenue- Money made from selling a good or service Profit Motive- force that encourages people to improve their wealth through economic activity Ex. You decide to open a Krispy Kreme on Hwy 14 to become wealthier

Competition in Free Enterprise Drives prices down to offset people true ambitions to make as much money as they can It creates reasonable prices for the consumer, but still leads to profit Ex. Gas Station Wars

By trying to earn profit producers help to allocate resources Allocate- to set aside or locate scarce resources We allocate our money or set it aside to fulfill wants that we feel are most important. Gas, Bills, Food

Ex. Seeking Profit Convenience Stores They charge a reasonable yet higher price on their products By convenience store A making profit, it will motivate Timmy to open his own store People allocate resources to places they know they will make money

Resources are now being allocated (set aside) for convenience stores instead of another area This creates competition and variety in the economy

Ethics and Free-enterprise 1.Allows for individuals to choose their own occupations. 2.Produces goods/services preferred by both the majority and the minority. 3.Rewards or punishes producers based on how well or poorly they respond to the buying public. 4.Supports the right of the individual to be free. 5.Provides an opportunity for individuals to strengthen and develop their abilities.

Rights Imply Responsibilities in a Free-Enterprise System The right to voluntary exchange implies the responsibility to provide honest information. The right to private property implies the responsibility to use it in a legal manner. The right to compete implies the responsibility of sportsmanship.

Role of Gov’t In Our Economy Our Gov’t plays a limited role in regulating our economy We call this modified free enterprise Refer to Circular Flow Model of Gov’t Interaction in economy

Gov’t and Free Enterprise Economic Decisions are made by buyers and sellers, this is called the free enterprise sector of the economy

Public and Free Enterprise Sector Public Sector- delivery and services by and for the gov’t ex. Military, Social Security Free Enterprise Sector- makes a good or a service if all costs and benefits go to the buyer and seller ex. Ford Motor Co.

All of the goods and services provided by the gov’t in public sector are funded by taxes Ex. Street lighting system These public goods can’t be taken away even though you don’t pay directly for them.

Taxes They are used to ensure that one person does not pay for military services or other public goods. They are used to make sure all people contribute towards public goods in some way It would be impossible to charge individually for all of these public services

Gov’t collects taxes to prevent free riders from taking advantage of public goods and services without paying Ex. Fireworks Display, It would be impossible to charge everyone who could see them to pay for them. So city takes the money out of tax dollars

Managing Externalities Externality- side effect that affects someone other than buyer or seller Negative Externality- imposes costs on people who were not involved

Positive Externality This creates benefits for people who were not involved with economic activity Ex. I build a tire factory in North Edwards. It will create jobs, bring in other businesses, and increase home values Gov’t works to increase these positive externalities

Gov’t Subsidies Gov’t provides money to help cover the cost of an economic activity that may help lots of people. Ex. Gov’t provides subsidies to open a free health clinic. It would benefit a whole community What would be another example of a community benefit through subsidy money?

Public Transfer Payments Gov’t also helps the sick, elderly, and poor in tough times Gov’t provides safety net programs to protect people from economic hardship Ex. Welfare, Social Security, Grants