Chapter 3:Chapter 3:American Free American Free

EnterpriseEnterpriseEconomicsEconomics

Mr. RobinsonMr. Robinson

ReviewReview What are the factors of productions?What are the factors of productions? What is opportunity cost?What is opportunity cost? What are the three economic What are the three economic

questions?questions? Describe a traditional, market & Describe a traditional, market &

centrally controlled economy?centrally controlled economy? What is the motivating force & and What is the motivating force & and

what is the regulating force in a free what is the regulating force in a free market?market?

Section 1:Section 1:Benefits of Free EnterpriseBenefits of Free Enterprise

A Tradition of Free A Tradition of Free EnterpriseEnterprise

There is an American tradition There is an American tradition giving people the freedom and giving people the freedom and flexibility to try out their business flexibility to try out their business ideas and compete in the ideas and compete in the marketplacemarketplace

The Basic Principles of Free The Basic Principles of Free EnterpriseEnterprise

1. Profit Motive1. Profit Motive The drive for the improvement of material well-The drive for the improvement of material well-

being.being.

2. Open opportunity 2. Open opportunity The ability for anyone to compete in the The ability for anyone to compete in the

marketplace.marketplace.

3. Legal equality 3. Legal equality Equal rights to all.Equal rights to all.

4. Private property rights 4. Private property rights The right to control your possessions as you The right to control your possessions as you

wish.wish.

The Basic Principles of Free The Basic Principles of Free EnterpriseEnterprise

5. Free contract 5. Free contract The right to decide what agreements in The right to decide what agreements in

which you want to take part.which you want to take part.

6. Voluntary exchange6. Voluntary exchange The right to decide what and when you The right to decide what and when you

want to buy and sell a product.want to buy and sell a product.

7. Competition7. Competition The rivalry among sellers to attract The rivalry among sellers to attract

consumers.consumers.

The Consumer’s RoleThe Consumer’s Role

• A fundamental purpose of the free A fundamental purpose of the free enterprise system is to give consumers the enterprise system is to give consumers the freedom to make their own economic freedom to make their own economic choices.choices.

• In dealing with producers, consumers make In dealing with producers, consumers make their desires known & indicate to their desires known & indicate to producers what to produce and how much producers what to produce and how much to make.to make.

• Consumers can also make their desires Consumers can also make their desires known by joining interest groups.known by joining interest groups.

The Government’s RoleThe Government’s Role Americans expect the government to Americans expect the government to

protect them from potential problems that protect them from potential problems that arise from the production of various arise from the production of various products or the products themselves.products or the products themselves. Public Disclosure LawsPublic Disclosure Laws

Evaluate important aspects of productsEvaluate important aspects of products Public InterestPublic Interest

Consumer protection (health, safety & well-Consumer protection (health, safety & well-being)being)

Imposing various restrictionsImposing various restrictions Negative effects of regulationNegative effects of regulation

Stifled competition & arbitrarily high pricesStifled competition & arbitrarily high prices

Section 2:Section 2:Promoting Growth and Promoting Growth and

StabilityStability

Tracking Business CyclesTracking Business Cycles

Study of the behavior and Study of the behavior and decision making of:decision making of: Entire economies Entire economies

(Macroeconomics)(Macroeconomics) Small units (Microeconomics)Small units (Microeconomics)

One measure of a nation’s One measure of a nation’s macroeconomy is gross domestic macroeconomy is gross domestic product (GDP). product (GDP).

Tracking Business CyclesTracking Business Cycles

GDP is the total value of all final goods GDP is the total value of all final goods and services produced in a particular and services produced in a particular economy.economy.

GDP = consumption + gross GDP = consumption + gross investment + government spending + investment + government spending + (exports − imports), or,(exports − imports), or,

GDP = C + I + G + (X − M)GDP = C + I + G + (X − M) Usually, GDP is expressed as a Usually, GDP is expressed as a

comparison to the previous quarter or comparison to the previous quarter or year. year.

Tracking Business Tracking Business CyclesCycles

A business cycle is a period of a A business cycle is a period of a macroeconomic expansion followed macroeconomic expansion followed by a period of contraction.by a period of contraction.

The government plays a role in The government plays a role in attempting to prevent wild swings in attempting to prevent wild swings in economic behavioreconomic behavior

Promoting Economic Promoting Economic StrengthStrength

Policymakers pursue three main outcomes as Policymakers pursue three main outcomes as they seek to stabilize the economy.they seek to stabilize the economy. EmploymentEmployment

One aim of federal economic policy is to One aim of federal economic policy is to provide jobs for everyone who is able to work.provide jobs for everyone who is able to work.

GrowthGrowth For each generation of Americans to do better For each generation of Americans to do better

than previous ones, the economy must grow than previous ones, the economy must grow to provide additional goods and services.to provide additional goods and services.

StabilityStability Stability gives consumers, producers, and Stability gives consumers, producers, and

investors confidence in the economy and in investors confidence in the economy and in our financial institutions, promoting economic our financial institutions, promoting economic freedom and growth.freedom and growth.

Technology & Technology & ProductivityProductivity

The government encourages the development The government encourages the development of new technologies in several ways. of new technologies in several ways.

Technology is the process used to produce a Technology is the process used to produce a good or service.good or service.

Federal agencies fund many research and Federal agencies fund many research and development projects. development projects.

New technology often evolves out of New technology often evolves out of government research.government research.

A patent gives the inventor of a new product A patent gives the inventor of a new product the exclusive right to produce and sell it for the exclusive right to produce and sell it for 20 years.20 years.

Section 3:Section 3:Providing Public GoodsProviding Public Goods

Public GoodsPublic Goods A public good is a shared good or service A public good is a shared good or service

for which it would be impractical to make for which it would be impractical to make consumers pay individually and to exclude consumers pay individually and to exclude nonpayers.nonpayers.

Public goods are funded by the public Public goods are funded by the public sector, the part of the economy that sector, the part of the economy that involves transactions of the government. involves transactions of the government.

A free rider is someone who would not A free rider is someone who would not choose to pay for a certain good or choose to pay for a certain good or service, but who would get the benefits of service, but who would get the benefits of it anyway if it is provided as a public it anyway if it is provided as a public good.good.

Market FailuresMarket Failures

Would the free market ensure that Would the free market ensure that roads are built everywhere they are roads are built everywhere they are needed?needed?

It’s doubtful. Neither could It’s doubtful. Neither could individuals afford to pay for a individuals afford to pay for a freeway.freeway.

A market failure is a situation in A market failure is a situation in which the market, on its own, does which the market, on its own, does not distribute resources efficiently.not distribute resources efficiently.

ExternalitiesExternalities

An externality is an economic side An externality is an economic side effect of a good or service that effect of a good or service that generates benefits or costs to generates benefits or costs to someone other than the person someone other than the person deciding how much to produce or deciding how much to produce or consume.consume.

ExternalitiesExternalitiesThe building of a new dam and creation of a The building of a new dam and creation of a

lake generates:lake generates: Positive ExternalitiesPositive Externalities

A possible source of hydroelectric powerA possible source of hydroelectric power SwimmingSwimming BoatingBoating FishingFishing Lakefront viewsLakefront views

Negative ExternalitiesNegative Externalities Loss of wildlife habitat due to floodingLoss of wildlife habitat due to flooding Disruption of fish migration along the riverDisruption of fish migration along the river Overcrowding due to tourism Overcrowding due to tourism Noise from racing boats and other watercraftNoise from racing boats and other watercraft

Section 4: Section 4: Providing a Safety NetProviding a Safety Net

The Poverty ProblemThe Poverty Problem

The poverty threshold is an income The poverty threshold is an income level below that which is needed to level below that which is needed to support families or households.support families or households.

The poverty threshold is determined The poverty threshold is determined by the federal government and is by the federal government and is adjusted periodically.adjusted periodically.

Welfare is a general term that refers Welfare is a general term that refers to government aid to the poor.to government aid to the poor.

Redistribution ProgramsRedistribution Programs Cash transfers are direct payments of Cash transfers are direct payments of

money money to eligible people.to eligible people.

Temporary Assistance for Needy Temporary Assistance for Needy Families (TANF)Families (TANF) This program allows individual states to This program allows individual states to

decide how to best use federally provided decide how to best use federally provided funds. funds.

Social SecuritySocial Security Social Security provides direct cash Social Security provides direct cash

transfers of retirement income to the transfers of retirement income to the nation’s elderly and living expenses to the nation’s elderly and living expenses to the disabled.disabled.

Redistribution ProgramsRedistribution Programs StabilityStability

Unemployment compensation provides Unemployment compensation provides money to eligible workers who have lost money to eligible workers who have lost their jobs.their jobs.

Workers’ CompensationWorkers’ Compensation Workers’ compensation provides a cash Workers’ compensation provides a cash

transfer of state funds to employees transfer of state funds to employees injured while on the job.injured while on the job.

Other Redistribution Other Redistribution ProgramsPrograms

In-kind benefitsIn-kind benefits In-kind benefits are goods and services provided In-kind benefits are goods and services provided

by the government for free or at greatly reduced by the government for free or at greatly reduced prices.prices.

Medical benefitsMedical benefits Health insurance is provided by the government Health insurance is provided by the government

for the elderly and disabled (Medicare) and for for the elderly and disabled (Medicare) and for poor people who are unemployed or are not poor people who are unemployed or are not covered by their employer’s insurance (Medicaid).covered by their employer’s insurance (Medicaid).

Education benefitsEducation benefits Federal, state, and local governments all provide Federal, state, and local governments all provide

educational opportunities for the poor.educational opportunities for the poor.