Characteristics of Free Enterprise Chapter 3

How does free enterprise answer the three economic questions What goods will be produced? How will the goods be produced? For whom will the goods be produced?

Circular Flow of Economic Activity

5 Characteristics of Free Enterprise Private Property Choice Voluntary Exchange Competition Economic Incentives

Laws, Institutions, and Regulations Legal systems can help or hinder free enterprise In U.S. laws have been developed to regulate banking and promote private property, which helps promote free enterprise

Profits and Losses Total revenue = price x number sold Total cost = avg cost of good x number sold Profit = Total revenue > Total cost Loss = Total cost > Total Revenue

An Ethical Economic System

Economic Principles in Key Documents Bill of Rights Declaration of Independence The Constitution

Economic Rights and Responsibilities in a Free Economy Open disclosure Obeying the law Being truthful

Entrepreneurs Has a talent for searching out and taking advantage of new business opportunities Develops new products Uses new ways of doing things

Profit and Risk Entrepreneurs expect to earn a profit. Entrepreneurs would not be willing to take a risk if they couldn’t expect a benefit.

The role of government in Free Enterprise Government as Enforcer of Contracts Government as Provider of Nonexcludable Public Goods Such as National Defense No one wants to pay for such goods, therefore it falls on the government Paid for by taxes

Externalities Third party effect Can be positive or negative Governments duty to minimize negative externalities Court system Regulation taxation