1. The Free Enterprise system
Chapter 2

2. The 6 Pillars of Free Enterprise
1. Private Property - the right to own property (capital & other resources owned by individuals or businesses rather than governments) is guaranteed by the U.S. Constitution (5th Amendment)
2. Specialization – is a process in which businesses & people focus on producing one or a few parts of an entire product
3. Voluntary Exchange – specialization leads to voluntary exchange; people must buy & sell products to acquire all the things they want

3. The 6 Pillars of Free Enterprise
4. The Price System- uses monetary prices as a message system (or “signals”) to facilitate exchanges between buyers & sellers
5. Market Competition- the rivalry among buyers & sellers in the purchase and sale of resources & products
a. Competition in markets for resources
b. Competition in markets for products
6. Entrepreneurship – is the motivation that drives business leaders to compete & react to changing conditions in the market

4. Three Economic Questions
What goods and services will be produced?
What do we have?
How will they be produced?
Hand > machine > elsewhere
Who gets what is produced?

5. 3 Economic Systems
Economic system (economy) – an organized way of providing for the wants and needs of people.
1). Command
2). Market
3). Traditional

6. Command Economies
Economic activity is planned out by the government, with people having little influence.
Examples:
Cuba
North Korea
China
Former Soviet Union

7. Command Economies - Pros
Allows an economy to change direction very quickly.
After Stalin’s first two Five Year Plans, Russia moved from a rural agricultural economy to an industrial economy.

8. Command Economies - Pros
Little uncertainty as to who will do what.
No unemployment because the government gives everyone a job (whether it is needed or not).
Ayn Rand - Anthem

9. Command Economies - Cons
Not designed to meet the wants of consumers.
Stalin’s Five Year Plan directed resources away from both agriculture and consumer goods.
Provides strange incentives
Do just enough to meet quotas.

10. Command Economies – More Cons
No rewards for individual performance.
Tetris
No flexibility to handle problems.
Great Depression disrupted the USSR’s First Five Year Plan
Requires a large decision making agency.
Stalin’s Five Year Plans governed all economic activity in Russia…that’s a lot of paperwork!

11. Market Economies
People and businesses act in their own best interests to answer the three basic economic questions.

12. Market Economies – How they work
Lure of personal and financial gain leads consumers and businesses to interact in various markets.
Each person acts as they see fit in order to advance their own interests.

13. The First Economist – Adam Smith
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Wealth of Nations, 1776

14. Market Economies - Pros
Economy can adjust to change over time
Businesses can adapt to changing consumer tastes by creating new/different products.
High degree of individual freedom
Businesses and individuals are free to do what they want.

15. Market Economies – More Pros
Small degree of government interference (Mixed Economy)
Economic decisions are made by all, not limited to government officials.
Seemingly unlimited variety of goods and services available to consumers.

16. Market Economies - Cons
Does not provide for the basic needs of everyone.
Elderly, disabled and other groups would be unable to survive in a market economy without governmental assistance.

17. Market Economies – More Cons
Does not provide certain services that people value.
National Defense & Education.
High degree of uncertainty
Tommy Boy
Jobs going overseas
Market Failures

18. Traditional Economies
Economic activity is based on tradition with roles determined by previous generations.
Examples:
Medieval Europe
Various hunting tribes in Africa and northern Canada (Inuit)
Amish
Aborigines

19. Traditional Economies – Pros
Everyone knows what their role is.
Life is generally predictable and stable.

20. Traditional Economies - Cons
Discourages new ideas and new ways of doing things.
Lack of progress leads to a lower standard of living.

21. The US Economic System Mixed Economy Free enterprise or Capitalism
Based on 4 important principles
Private Property
Freedom of choice
Profit
Competition

22. The circular flow
Households - includes everyone living in the U.S., play 2 important roles:
1. Consumers - use the goods & services that businesses produce
2. Resource Owners - owners of all the economy’s resources labor & other productive resources)

23. The circular flow
Goods & Services (or Products) Market- when households exchange money for the goods & services businesses produce
Resource Market- when households exchange their labor & other resources in the resource markets for money to spend in the goods & services (products) markets

24. The Circular flow
How does money earned from one business (from the resource market) become income for another business (in the goods & services market)?
People earn money for their labor from one business which they spend on goods & services from other businesses. (The money is income for other the business.)

25. barter Exchanging goods & services without using money
We have not always used “money,” because people traded other items
Wampum (shells), animals, produce, crops (tobacco), metals, rocks, salt (“salary”)
Barter is not an easy way to trade
Both sides have to be willing to accept what is traded or you have to find what they want

26. Three Functions of Money
Medium of Exchange- accepted (or exchanged) in return for most goods & services
2. Store of Value- can be saved for future buying power
3. Measure of Value (or prices)- money indicates the relative value of products and resources

27. Economic Goals
Full employment – almost all people in the labor force are able to find work
Economic growth – an increase in output of goods & services in the U. S. economy during a year
Price stability – prices of goods, services & resources do not fluctuate significantly in short periods of time.

28. Economic Goals
Economic freedom – freedom of choice in employment, buying, selling, use of our time, & other decisions related to our economy
Economic security – the basic needs of every person should be met
Economic Equity – fairness & impartiality
Efficiency – Getting the maximum output from the resources used to produce goods & services

29. Economic Freedom
Individuals have freedom to choose their own occupations, employers, and spending habits.
Businesses have freedom to choose how and where to produce goods/services.
Are we meeting this goal?

30. Economic Equity People should receive equal pay for equal work.
People should receive adequate pay for the work they perform.
People should all have the same opportunities to get ahead.
Are we meeting this goal?

31. Economic Security
We should have protection from negative economic events such as layoffs and injuries.
Social Security – federal program that provides disability and retirement benefits.
Everyone should have their basic needs met.
Are we meeting this goal?

32. Price Stability
We should have stable prices that protect against inflation.
Inflation – a rise in the general level of prices.
Are we meeting this goal?

33. When economic goals are not met…
…People get mad!!!!!!!

34. John Mellencamp - Scarecrow
As you listen, think about the goals of:
Economic Equity?
Economic Security?