American Free Enterprise Economics Chapter 3

Basic Principles of Free Enterprise Chapter 3: Section 1

#1: Profit Motive The incentive that drives individuals and business owners to improve their material well being FORCES business owners to exercise financial discipline because they are responsible for their own success or failure ENCOURAGES entrepreneurs to take rational risks, and rewards innovation by letting creative companies grow

#2: Open Opportunity The principle that anyone can compete in the marketplace Different people will have varying degrees of success or failure, but everyone has the freedom to try Economic mobility can go up or down, no matter how much money you start out with You either end up better off or worse off, depending on how the business performs

#3: Legal Equality

Legal Equality Principle that everyone has the same legal rights BENEFITS the economy by maximizing a country’s use of its human capital Companies that restrict legal rights of certain groups (women or minorities) lose the productive potential of a large portion of their society

#4 Private Property People have the right to control their possessions and use them as they wish The CORNERSTONE of the free market system

#5:Freedom to Buy and Sell Free Contract  people decide what agreements they wish to enter into Voluntary exchange  people decide what, when, and how they want to buy and sell Not forced to buy or sell anything Encourages competition

The Role of the Consumer

Role of Consumer Consumers send signals by choosing to buy or not to buy Form interests groups  private organizations that try to persuade public officials to act in ways that benefit its members

Economic Freedom and the Constitution Property Rights Taxation Contracts

Property Rights 5 th Amendment  “no person shall be deprived of life, liberty, or property, without due process of law Prevents government from taking property from its owner except when there is a public reason Eminent Domain  the right of the government to take private property for public use Government must pay fair value

Taxation Article 1 of the Constitution gives Congress the power to levy taxes Both individuals and corporations must pay federal taxes

Contracts Constitution guarantees people and businesses the right to make contracts which are legally binding agreements No laws can be passed that change someone’s business arrangements

The Role of Government in the Marketplace 1: Information and Free Enterprise 2: Protecting Public Health, Safety, and Well-Being

Information and Free Enterprise Consumers cannot make informed choices if they do not have basic information about the products they are buying Public disclosure laws  laws that require companies to provide information about their products or services

Protecting Public Health, Safety, and Well-Being Government sets manufacturing standards, requires that drugs be safe and effective, and supervises the conditions in which foods are produced to make sure they are sanitary

Negative Effects of Regulation Can be costly to implement and monitor Cuts into profits Slows growth