FREE ENTERPRISE
Chapter 3
Reminder: Your first unit test is on Friday. It
will be a combination of 38 multiple choice
and 3 free-response for a total of 50 points.
Notebooks will be collected at the beginning
of class on Friday.
CHAPTER 3: SECTION 1
Characteristics of Free Enterprise
How Does Free Enterprise Answer the Three Economic
Questions?
In a free enterprise economy, business firms will produce the
goods that consumers want to buy. For example, General
Motors and Ford Motor Company decide what style and make
of cars they will produce based on what they think the carbuying public wants to buy.
The individuals who own and manage the business firms
decide how goods will be produced.
In a free enterprise economy, goods are produced for people
who are both willing and able to buy them. For example, a
person may have $1,000 to spend on a new computer, but be
unwilling to replace his or her old computer. In this case, the
potential buyer is able, but not willing, and a sale will not take
place.
Free Enterprise
In a free enterprise system, individuals own most, if not all, of the resources.
Five Features of Free Enterprise
Private property can be described as any good that is owned by
an individual or a business, such as a car, a house, or a piece of
machinery. Any good that is owned by the government is
referred to as public property.
• Sometimes the government may have a need for private
property. Under the right of eminent domain, the
government can take ownership of private property even
without the consent of the owner. In such cases, the
government will compensate owners for their loss.
Eminent domain has been used to obtain private land for
such uses as building new schools, highways, and
government buildings.
Freedom of Choice.
• Workers have the right to choose what work they
want to do and whom they will work for.
Businesses have the right to choose the products
they will produce and offer for sale. Likewise,
buyers have the right to choose the products they
will buy.
Voluntary Exchange
• In free enterprise, individuals have the right to
make exchanges or trades that they believe will
make them better off. Trading $10 cash for a book
is an example of a voluntary exchange.
Competition
• Free enterprise also gives way to competition.
Consumers are likely to benefit from competition
between sellers. Workers can also benefit from
competition. The competition between employers
for labor services will often result in higher wages.
Economics Incentives
• Under free enterprise, money acts as an incentive to
produce. If you produce goods and services that
people are willing and able to buy, you receive
money in return.
Laws, Institutions, and Regulations
A country’s legal system determines, to a large
degree, how free enterprise operates.
Legal systems and institutions can either help or
hinder free enterprise.
The Circular Flow
The circular flow of economic activity in the U.S.
economy shows the relationship among the key
players in the economy.
Households sells resources to businesses, and
businesses pay for these resources.
Businesses sell goods and services to households,
and households pay for these goods and services.
Households pay taxes to government, and
government provides goods and services to
households, such as roads, schools and national
defense.
Businesses pay taxes to government, and
government provides goods and services to
businesses.
The Circular Flow of Economic Activity
The circular diagram is useful because it helps us see how a
change in one economic activity (such as paying taxes) will
lead to a change somewhere else in the economy (such as the
amount households spend on goods and services produced by
businesses).
CHAPTER 3: SECTION 2
Profit and Loss in Free Enterprise
Profits and Losses
Profit equals total revenue (price of a good times the units of
the good sold) minus total cost (average cost of a good times
the number of units of the good sold).
Profit is the amount of money left over after all the costs of
production have been paid. Profit exists whenever total
revenue is greater than total cost.
A loss occurs when the total cost exceeds total revenue.
Profits and Losses
TOTAL REVENUE =
price of a good x number of units sold
TOTAL COST =
average cost of a good x number of units sold
PROFIT = total revenue > total cost
LOSS = total cost > total revenue
For example, suppose you sell 10 CD players at $100 each,
for a total revenue of $1,000. If it costs you an average of $70
each to produce those CD players, your total cost to produce
10 CD players is $700. Do you have a profit or a loss on your
sale of 10 CD players?
Answer: Profit of $300
Profit and Loss as “Signals”
In a free enterprise economy, some businesses are earning
profits and some are taking losses. Profits and losses are
1. signals to the firms actually earning the profits or
taking the losses, and
2. signals to firms standing on the sidelines
A firm on the sidelines will see what product is profitable and
possibly enter that market.
A firm may discontinue a product that is producing losses,
and reallocate its resources to a profitable product.
Resources flow toward profit and away from losses.
CHAPTER 3: SECTION 3
The Ethics of the Free Enterprise System
Ethics and Free Enterprise
Ethics consists of the principles of CONDUCT, such as right and
wrong, morality and immorality, and good and bad.
An ethical economic system should have four characteristics. Supporters
of free enterprise say that the free enterprise economic system has these
characteristics.
•
Allow individuals to CHOOSE their own occupations or
professions.
•
Produce the goods and services preferred by both the majority and
the MINORITY.
•
REWARDS (or PUNISHES) producers according to how well (or
poorly) they respond to the preferences of the buying public.
•
Provide people with numerous FREEDOMS, including the freedom
to work where they want to work, the freedom to start their own
businesses if they want, the freedom to acquire property, the
freedom to buy and sell the goods they want to buy and sell, and
even the freedom to FAIL.
Economic Principles in Key Documents
The Bill of Rights shows a high regard for PRIVATE property.
•
The Bill of Rights notes that “private property [shall not] be
taken for public use, without just COMPENSATION.”
The Declaration of Independence encourages free TRADE - an
essential ingredient of free enterprise.
•
The Declaration of Independence lists COMPLAINTS
against the king of Great Britain, George III. One complaint is
that the king prevented the 13 colonies from “TRADING
with all parts of the world.”
The Constitution preserves COMPETITION – an important
feature of free enterprise – by denying states the right to tax each
other’s goods.
•
Article 1, Section 8, of the U.S. Constitution states that “no
tax or duty shall be laid on articles EXPORTED from any
State.” To preserve competition, it was important to allow the
free trade of goods ACROSS state lines.
Economic Rights and Responsibilities in a Free Enterprise
Economy
People in a free enterprise economy usually share three sets
of rights and responsibilities:
•
OPEN DISCLOSURE
•
•
The right to sell an item comes with the
responsibility to disclose any relevant facts about the
item in question.
OBEYING THE LAW
•
•
One has the right to use private property as one
wishes, within the limits of the law.
BEING TRUTHFUL
•
The responsibility attached to the right to compete is
that one must compete in a truthful, legitimate
manner.