1. Capitalism & Free Enterprise
Economics 101
Capitalism & Free Enterprise

2. The economic systems

3. In a Command economy, the government answers the three basic questions …(1) What to produce (2) How to produce (3) For Whom to produce

4. The government directs economic decision-making

5. Top-down decision making

6. Little individual choice

7. Little competition

8. the government controls factors of production, sets wages and prices, and makes all major economic decisions

9. In command economies, there is a central planning agency (Gosplan in the former Soviet Union)

10. The central planning agency sets production goals and quotas (“Five Year Plans” under Stalin)

11. Command economies have proven to be less productive than market economies

12. This is largely because there is little incentive for businesses and workers to perform at high levels

13. Examples of command economies would be communist countries, such as China (although they have started implementing more capitalist features)

14. Another type of economic system is a Traditional economy

15. Traditional Economy – economic decisions based on customs passed down from generation to generation

16. People supply what they need by hunting, farming, and making things by hand

17. Everyone has a well-defined role

18. People share resources

19. There is little change

20. There is little innovation, and, as a result, little progress (and little economic growth)

21. Traditional economies are stagnant compared to market economies

22. Examples: Native Americans, Eskimos in Alaska, “Developing countries” (non-industrialized “Third World”)

23. However, most economic systems are mixed economies … combining elements of each!

24. Mixed Economy – combines basic elements of a pure market economy and a command economy

25. In a “Socialist” economy, The government controls the major industries (mail, railways, power & other utilities, oil & steel production, health care, education, etc.)

26. Whereas socialist economies would be considered “command” economies, there is still widespread small-scale private ownership of businesses by private citizens (like in a market economy) There is high, “progressive” taxation that pays for many government programs that benefit its citizens

27. Wealth is more equally distributed

28. In the U.S., which is a market economy, the government regulates part of the economy

29. Why does the government regulate part of our economy
Why does the government regulate part of our economy? 1) protect consumers 2) protect workers 3) protect the environment 4) protect businesses (maintain competition)

30. We’re going to talk more about how the government regulates our economy a wee bit later!

31. Our government also provides public goods that the private sector does not provide (We’ll talk about that later, too!)

32. You can even argue that our economy has aspects of socialism (Medicare, The post office, Social Security, Amtrak, etc)

33. The point being … most economies are mixed economies

34. Let’s get back to our market economy that we have here in the United States

35. Market Economy – The three basic economic questions are answered by individual citizens based on the market forces of supply and demand

36. The U.S. economy is built on capitalism and free enterprise

37. Capitalism – An economic system in which private citizens own and use the factors of production to seek a profit

38. Before we examine the Factors of Production, let’s first understand the results (or outputs) of production

39. Economic outputs can be divided into two categories:
GOODS & SERVICES

40. Goods – A tangible, physical product (Examples: stapler, computer, soda, clothes)

41. Services – work performed for someone else
Services – work performed for someone else. (Ex: getting a haircut, babysitting, teaching)

42. Factors of Production are needed to produce goods and services IN CAPITALIST ECONOMIES, THE FACTORS OF PRODUCTION ARE PRIVATELY OWNED!

43. CELL There are 4 Factors of Production
To help you learn them, remember this acronym:
CELL

44. The “C” stands for CAPITAL You cannot have Capitalism without Capital
So, what is capital?

45. CAPITAL – man-made materials used to produce goods & services
(Ex: tools, machinery, factory, etc.)

46. Capital is also financial It’s the money necessary to start and run a business

47. We also have human capital … these are your personal talents, abilities, smarts, education (skill level), motivations, initiatives, etc. that are essential for being successful in business

48. This is one reason for you to be in school… you are investing in your human capital!

49. Do you know the difference between a capital good and a consumer good?

50. An oven in a bakery used to produce pastries is a capital good
An oven in your home used to cook your meals is a consumer good
Both are ovens, but one is a capital good and the other is a consumer good

51. The “E” in CELL stands for ENTREPRENEUR

52. ENTREPRENEURS – The individuals who start new businesses;
Entrepreneurs introduce new products;
They improve management techniques;
Entrepreneurs are innovative risk-takers

53. Entrepreneurs are driven by the “invisible hand” (self-interest)

54. Entrepreneurs take a risk in hopes of earning a profit

55. Entrepreneurs drive the economy because they use factors of production to produce new products

56. The first “L” in CELL stands for LAND

57. LAND (Land is shorthand for Natural Resources) –
Naturally occurring materials that make production possible
Ex: land, trees, minerals,

58. Another way to look at LAND would be this: Mother Nature’s gifts
Another way to look at LAND would be this: Mother Nature’s gifts! What we get from the planet Earth

59. The 2nd “L” (and 4th Factor of Production) in CELL stands for LABOR

60. LABOR – The nation’s workforce
Labor is also referred to as human resources
Labor includes both physical and mental work

61. White-collar labor Works with the mind; it’s mental labor
White-collar labor Works with the mind; it’s mental labor! (Ex: manager, accountant, lawyer, etc)

62. Blue-collar labor Works with muscles; it’s physical labor
Blue-collar labor Works with muscles; it’s physical labor! (Ex: construction worker, mechanic, plumber, etc)

63. Which does a market economy value more? How do you know? Why?

64. In a capitalist economy, the factors of production are privately owned by individual citizens. They organize these factors of production to produce goods and services They do this to make a profit!

65. A capitalist system is a market economy that operates under the laws of supply & demand And, in a true capitalist, market economy … there is free enterprise

66. Free enterprise – economy in which competition is allowed to flourish with a minimum of government interference

67. These ideas about free enterprise and competition were first introduced by the Scottish economist, Adam Smith

68. Adam Smith

69. Adam Smith – You could call adam smith the founder of modern economics
Adam Smith – You could call adam smith the founder of modern economics! His famous book in which he laid out the principles of capitalism and free enterprise is called… The Wealth of Nations (1776) (shortened title)

70. Adam Smith developed the “Invisible hand” concept

71. The invisible hand guides the behavior of the buying and seller in the market. So what drives their behavior? Self-interest! The drive for profit! Adam smith wrote all about that in the Wealth of Nations.

72. Adam smith also coined the phrase, Laissez-Faire – “to be left alone;” the idea that government should not interfere in the marketplace (In other words, Free Enterprise)

73. Adam smith believed in Free Trade – no trade barriers between countries. He was opposed to tariffs (taxes on imports) and quotas (setting limits on what can be imported)

74. So, what are the basic principles of capitalism that Adam Smith wrote about?

75. Capitalism has SIX features (McVepp)
Markets
Competition
Voluntary Exchange
Economic Freedom
Private Property
Profit Motive

76. MARKETS

77. MARKETS Where buyers & sellers meet for exchanges
Guided by the laws of supply and demand
Markets set prices
Markets connect different sectors of the economy
Free enterprise is limited government control
Consumer Sovereignty

78. Consumer Sovereignty

79. A consumer is a buyer of a good or service Consumption is buying a good or service for your own personal use The consumer has the power in the marketplace!

80. The consumer is king (or queen) of the market!

81. Don’t forget, the consumer is always right!

82. COMPETITION Competition between sellers Competition between buyers
Competition between buyers and sellers
Competition increases the quality of products, but lowers the price
Competition gives consumers more choice
Competition – rewards the most efficient producers and forces the least efficient out of business

83. VOLUNTARY EXCHANGE
Voluntary Exchange – the act of buyers and sellers freely and willingly engaging in market transactions
WILLINGNESS & ABILITY are the key concepts. BOTH must be present before a transaction can take place
BOTH buyer and seller must feel that they benefit from their exchange, or the transaction will not take place

84. ECONOMIC FREEDOM Choice is the key element
We choose our job/profession
We choose what products we buy
Businesses choose who they hire
Businesses choose what they pay and set working conditions

85. PRIVATE PROPERTY The private ownership of the factors of production
Individuals own businesses in capitalism
We are free to own and use our property as we choose as long as we do not interfere with the rights of others
These rights give us the incentive to work, save, and invest
Also, these rights give incentive to take better care of things

86. PROFIT MOTIVE
Profit – the money left over after all costs of production have been paid
People are better off at the end of a period than at the beginning
Profit Motive – the driving force behind capitalism
(again, Adam Smith called this the “invisible hand”)
“Self-interest is good”; “Greed is good”
Entrepreneurs are willing to invest in a business venture and risk losing their investment for the chance to earn a profit