- Gives the right to own & exchange private property voluntarily
- Open opportunity: ability to enter & compete in the market by choice
- Legal equality: everybody has the same economic right under the law
- Free contract: right to decide which legal agreement to enter into
- Profit motive: incentive to gain from economic activity
- Example: Profit in Rocks
- 1975 Pet rock became a very popular & profitable gift during the holiday season
- Early 1976 consumers stopped buying & the owner got out of the business
- Example: Competition over books
- Demand for books high, competition driving out small booksellers
- Before 1995, small chain stores & independent neighborhood booksellers dominated book market
- 1995, large chains offered discounted prices, appealing atmosphere
- 1995, online booksellers open w/ huge numbers of titles, low prices
- Small store now offer personal service, specialized or local topics
- Market failure occurs when economic transactions causes externalities
- Externality: side effect on someone other than buyer or producer
- negative externality: people uninvolved in the transaction buy cost
- positive externality benefits people in the transaction buy cost
- Example: Paying for Negative Externalities
- Factory owners: little encouragement to pay to cut industrial pollution
- Government limits negative externalities through taxes & fines
- offset medical cost & provide incentives to reduce pollution
- Example: Spreading positive externalities
- A new local college business, community as a whole
- The government tries to increase positive externalities
- Subsidy: government payment to help cover cost of economic activity
Managing Externalities
What is a Free Enterprise System?
- Free to choose
- Believes market should be free to operate in all fields
- Thinks government's most important economic role is control money supply, w/out this government would experience inflation
- Served as adviser to two U.S. presidents & foreign heads of state
- 1976 he won Nobel Prize for Economics
- Recent years a scholar has founded an organization promoting educational freedom
Milton Friedman: Promoter of Free Markets
- Capitalist system also known as free enterprise system
- anybody is free to start a business or enterprise
- Example: United States
- Entrepreneurs are free to start a business and choose how to use their money/ resources
- Consumers choose which goods & services they will buy
- The government protects or encourages competition, enforces contracts
- Emerging Markets
- Most countries have mix of tradition, government involvement, free enterprise
- Mexican government rules & regulations make starting a business hard
- Street vendors don't follow regulations & have driven some retail stores out of business
- Singapore government is very involved & keeps business costs low
- Requires employers to pay benefits
- Requires workers to put a percentage of income in a government savings scheme
- Government is important but with limited role in U.S. economy
- Modified free enterprise economy:
- government protections, provisions, regulations adjust capitalism
- Modified Free Enterprise
- Like businesses any household, government is consumer & produce
- as consumer, buys factors of production in resource market
- as consumer, buys products in product market
- as producer, provides goods & services t businesses, households
- collects taxes in payments, uses them to pay for resources & products
Government in the U.S. Economy
The American Free Enterprise System
The Roles of Producers & Consumers
- Consumer try to get the best deal for their money
- Producers try to earn the most profit
- Profit: money left after production costs subtracted from sale price
- Example: Producers Seek Profit
- Neighborhood coffee shop demonstrates how producers help allocate resources`
- to earn profits, charge highest price consumers are willing to pay
- profits encourage others to open similar businesses
- result: productive resources are directed towards the coffee shop
- Example: Consumers Vote with Their Wallets
- Consumers help allocate resources through their choice of product
- their choices will guide producers to provide what consumers will buy/ want
- Early 2000s, low-carbohydrate diets became popular
- food producers put some of their resources into low-carb market to meet consumer demand
- 2004, producers cut back when consumers interest declined
By: Antonio Torres & Alexandra Rivera
Period: 3
Public Transfer Payments
- A limitation of free enterprise:
- people unable to contribute cannot access all economic opportunities
- Safety net: government programs designed to protect people from economic hardship
- Redistributing Income
- Transfer payments move income from person or group to another
- recipient does not provide product in return
- Public transfer payment: made by government w/ tax money
- Most public transfer payments in area of social spending
- the money usually go to the poor, aged, disabled, or people who have lost their jobs
Street lighting is an example of a public good.
Providing Public Goods
- Public sector: branches of government that make production decisions
- Market failure: outsiders benefit from or pay for marketplace interaction
- Public goods: products provided by government, consumed by public
- Public goods founded w/ taxes
- Example: Characteristics of Public goods
- Two characteristics of public goods:
- people who do not pay cannot be excluded
- one person's use does not make product less useful to others
- Street lighting is impossible to determine the price or benefit for people
- Example: Free Riders
- free rider: person who benefits but does not pay for good or service
- only way to have public goods for government to fund w/ taxes
- Examples: 4th of July, law enforcement
- Public & Private Sectors: Shared Responsibilities
- Some goods provided by either public or private sector
- toll goods: consumed by the public but people can be excluded
- Infrastructure: the goods & services needed for society to function
- examples: highways, water, health care, sewer
How a free Enterprise System Works