Power of the Market Free Enterprise

Five Pillars of Free Enterprise

Private Enterprise In our country, we have the freedom to choose our business. You have the decision whether or not you should go into computer services or any other kind of enterprise (business). You will decide what fees to charge and what hours to work. Certain laws prohibit you from cheating or harming your customers or other people. But, in general, you will be left alone to run your business as you see fit.

Private Property Private property is a piece of land, a skill set, a home, or a car owned by an individual, a family, or a group. It differs from a public building, or public property, such as the city hall, a park, or a highway, all of which provide a government service for all citizens. In the U.S. economic system, people's right to buy and sell private property is guaranteed by law. People must use the property in safe and reasonable ways, of course. In setting up computer systems for your customers, for example, you do not have the right to interfere with the electrical, telephone, or computer systems of other people.

Private Property The right to own private property is guaranteed in the Constitution. The Constitution states in the Fifth Amendment that no person ” be deprived of life liberty, or property, without due process of law; nor shall private property be taken for public use, without compensation.”

Profit Motive The main reason why you or any enterprising person organizes a business is to make money. You do this by earning more money than you spend. The amount of money left over after subtracting your business expenses from your business income is known as your profit. In the free enterprise system, business firms try hard to keep costs down and increase their income from sales. The better they succeed at this, the higher are their profits. Economists describe the efforts by business firms to earn the greatest profits as the profit motive.

Competition Just as you are free to start a computer business, so is everyone else. The rivalry between sellers in the same field for consumers' dollars is called competition. If your business is profitable, it is likely that others will enter the same business hoping to be as successful as you are. They will be competing with you for the same customers. To win a share of the computer business, other sellers may try to offer more and better services, or services at lower prices. Because of the pressure of competition, business firms must constantly try to provide the best services and create the best products at the lowest possible prices.

Consumer Sovereignty In the end, it is the customers, or consumers, who determine whether any business succeeds or fails. In the U.S. free enterprise economy, consumers are said to have sovereignty-the power or freedom to have final say. Consumers are free to spend their money for Product X or for Product Y. If they prefer Y over X, then the company making X may lose money, go out of business, or decide to manufacture something else (perhaps Product Z). Thus, how consumers choose to spend their dollars causes business firms of all kinds to produce certain goods and services and not others.

Other factors Self Interest Motive Voluntary Exchange Limited Government Market

Self-Interest Self-Interest is whatever interests the individual, whatever they value, whatever goals they pursue. People get to pursue what interests them based on a judgment of their own values. Reflects the individual’s freedom to pursue their own interests.

Self Interest Because people are self interested, they will make decisions based on what is best for them. Adam Smith referred to this as the “Invisible Hand,” because when people do what is best for themselves, resources are used more efficiently and it ends up benefitting the economy and society as a whole.

Voluntary Exchange This the act of buyers and sellers coming together freely and willingly in the market place exchanging goods and services for money. Both parties will be better off than before or they would not engage in the transaction. Ex: I want a Dr. Pepper, and the store will sell me one for $1.50. Because I am willing to pay that for a DP and the store is willing to sell it, we are both better off than before. Buyers can do a lot of things with their money and if they decide to spend it, they must believe that whatever it is they purchase is of greater value to them than the money they gave up. The same is true for the seller. If one party doesn’t feel they will benefit, they have every right to cancel the transaction.

Limited Government Laissez Faire. Most market or free enterprise economies can operate without too much government interference. There are some limited roles for the government to play in a market economy that are legitimate. Define and enforce property rights Provide some public goods and services such as national defense. Protect non-responsible individuals.

Market A free enterprise economy is based on markets. This is where there is private ownership of resources and the economic questions are answered in the market place by the interaction of buyers and sellers.

Questions What are the five pillars of capitalism? What is the role of the consumer in the U. S. free enterprise economic system? Describe the role of an entrepreneur in a free enterprise system Describe the role of government in capitalism. Why is private property so important to a Free Enterprise economy? What does competition lead to?