Chapter 3: American Free Enterprise Section 1
Objectives 1. Define the basic principles of the U.S. free enterprise system. 2. Describe the role of the consumer in the American economy. 3. Identify the constitutional protections that underlie free enterprise. 4. Explain why the government may intervene in the marketplace.
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Key Terms • profit motive: the incentive that drives individuals and business owners • open opportunity: the principle that anyone can compete in the marketplace • legal equality: the principle that everyone has the same legal rights • private property rights: the principle that people have the right to control their possessions and use them as they wish Chapter 3, Section 1
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Key Terms, cont. • free contract: the principle that people may decide what agreements they want to enter into • voluntary exchange: the principle that people may decide what, when, and how they want to buy and sell • interest group: a private organization that tries to persuade public officials to act in ways that benefit its members • patriotism: love of one’s country Chapter 3, Section 1
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Key Terms, cont. • eminent domain: the right of a government to take private property for public use • public interest: the concerns of society as a whole • public discourse laws: laws requiring companies to provide information about their products or services
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Introduction • What are the benefits of free enterprise? – Free enterprise makes it possible for people who have ideas and persistence to start businesses and make themselves successful. – Free enterprise also offers a great deal of economic freedom to the consumer.
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What is Free Enterprise? • The United States is considered by many to be a “land of opportunity.” • The American tradition of free enterprise has been a key factor in supporting this belief.
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Principles of Free Enterprise • Characteristics of a free enterprise include: – Profit motive • The American economy rests on recognition of the profit motive as a key incentive. In a free enterprise businesspeople make decisions based on what will increase their profits.
– Open opportunity • The American principle of open opportunity says that anyone can compete in the marketplace.
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Principles, cont. • Checkpoint: What are three key economic rights that Americans enjoy? – Legal equity • American free enterprise believes in the principle that everyone has the same legal rights.
– Private property • The free enterprise system allows people to make their own decisions about their own property.
– Freedom to buy and sell • People can decide what agreements to enter into, as well as what, when, and how they want to buy and sell.
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The Role of the Consumer • Checkpoint: What role do consumers play in a free enterprise system? – In the free enterprise system consumers have the freedom to make their own economic choices. Through voluntary exchange, consumers send a signal to businesses, telling them what to produce and how much to make. – Consumers can also make their wishes known to businesses by joining interest groups, which influence public officials to act in ways that benefit its members.
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The Constitution • Free enterprise in the United States is written into the framework of the U.S. Constitution. – One right granted by the Constitution is the 5th Amendment, which protects private property from being taken from a citizen without due process. – However, the government is allowed to take property from an individual, paying fair market value for that property, when there is a public reason. This is known as eminent domain. Chapter 3, Section 1
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The Constitution, cont. • The Constitution also spells out how government can tax individuals and businesses. – According to Article 1, Congress could levy taxes but not until the passage of the Sixteenth Amendment in 1913 Congress could levy an income tax on individuals and businesses.
• Finally, the Constitution guarantees people and businesses the right to make contracts. Chapter 3, Section 1
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The Role of Government • The government plays many roles in the marketplace. • These roles include: – Carrying out the constitutional responsibilities to protect property rights, contracts, and other business activities – Making sure that producers provide consumers with information – Protecting the health, safety, and well-being of consumers. Chapter 3, Section 1
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Major Federal Regulatory Agencies • All of the agencies to the right represent ways the federal government intervenes in the marketplace. – Identify one agency meant to protect each of the following: (a) public safety, (b) fair competition, (c) equality. Chapter 3, Section 1
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Negative Effects of Regulation • Negative effects of government regulation include: – Rules are costly to implement – Regulations stifle competition – Increased government spending in industries because the government has to hire workers to do the actual oversight
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Chapter 3: American Free Enterprise Section 2
Objectives 1. Explain why the government tracks and seeks to influence business cycles. 2. Describe how the government promotes economic strength. 3. Analyze the factors that increase productivity.
Chapter 3, Section 2
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Key Terms • macroeconomics: the study of economic behavior and decision-making in a nation’s economy • microeconomics: the study of the economic behavior and decision-making in small units, such as households and firms • gross domestic product: the total value of all final goods and services produced in a country in a given year • business cycle: a period of macroeconomic expansion, or growth, followed by one of contraction, or decline Chapter 3, Section 2
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Key Terms, cont. • referendum: a proposed law submitted directly to the public • obsolescence: situation in which older products and processes become out-of-date • patent: a government license that gives the inventor of a new product the exclusive right to produce and sell it • copyright: a government license that grants an author exclusive rights to publish and sell creative works • work ethic: a commitment to the value of work Chapter 3, Section 2
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Introduction • How does the U.S. government encourage growth and stability? – The U.S. government encourages growth and stability by: • • • • • Chapter 3, Section 2
Tracking business cycles Promoting a high employment rate Keeping prices stable Encouraging the development of new technologies Taking pride in the American work ethic Copyright © Pearson Education, Inc.
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Tracking Business Cycles • Even under the free enterprise system, the government intervenes to influence macroeconomic trends. • One measure of the nation’s economic well-being is gross domestic product (GDP). Chapter 3, Section 2
How much did the GDP grow between 1910 and 2010?
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GDP and the Business Cycle • During a period of growth, GDP goes up and in a period of contraction, GDP goes down. • This pattern of a period of expansion followed by a period of contraction is called a business cycle. – Changes in the business cycle take place because individuals and businesses, acting in their own self-interest, make decisions about factors such as prices, production, and consumption. Chapter 3, Section 2
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Promoting Economic Strength • Checkpoint: What three goals does the government try to meet when promoting economic strength? – High employment – Economic growth – Stability and security
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Employment and Growth • Employment – The government strives to make sure there are enough jobs for everyone who is able to work. – An unemployment rate between 4 percent and 6 percent is considered healthy.
• Economic Growth – To help spur economic growth, the government can cut taxes or increase spending. Chapter 3, Section 2
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Stability and Security • Stability and Security – One indicator of economic stability is the general level of prices. – The government seeks to prevent sudden, drastic shifts in prices so that neither the consumer nor the producer suffers. – Other indicators of stability are financial institutions such as banks and the stock market. Government regulations seek to keep these institutions as stable as possible. Chapter 3, Section 2
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Economic Citizenship • Voters have a say in promoting economic strength by: – Voting for public officials – Voting on referendum
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Technological Progress • Checkpoint: How does improved technology help the economy? – Technological progress has enabled the U.S. economy to operate more efficiently.
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T These college entrepreneurs, Gavin McIntyre and Eben Bayer, created a new “green” insulation partly from mushrooms they grew under their beds.
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Technological Progress, cont. • Many inventions have improved productivity in the United States, including: – The light bulb, which made a longer workday possible – The assembly line, which led to mass production at affordable costs
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The Government’s Role • The government promotes innovation and invention to help maintain the country’s technological advantage by: – Funding research and development projects at universities – Establishing their own research institutions, like NASA – Granting patents and copyrights, which are an incentive to innovation
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The American Work Ethic • Economic growth cannot occur without individual effort. – Americans pride themselves on their strong work ethic, which has them not only working hard but caring about the work that they do. – The American work ethic has long been seen as a key ingredient in the nation’s productivity and economic success.
Chapter 3, Section 2
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Chapter 3: American Free Enterprise Section 3
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Objectives 1. Identify examples of public goods. 2. Analyze market failures. 3. Evaluate how the government allocates some resources by managing externalities.
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Key Terms • public good: a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who did not pay • public sector: the part of the economy that involves the transactions of the government • private sector: the part of the economy that involves the transactions of individuals and businesses • infrastructure: the basic facilities that are necessary for a society to function or grow Chapter 3, Section 3
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Key Terms, cont. • free rider: someone who would not be willing to pay for a certain good or service but who would get the benefits of it anyway if it were provided as a public good • market failure: a situation in which the free market, operating on its own, does not distribute resources efficiently • externality: an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume Chapter 3, Section 3
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Introduction • Why does a society provide public goods? – The government provides society with certain public goods because it would be inefficient or impractical for a free market economy to provide these goods on its own.
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Public Goods • A public good is a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who do not pay.
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Public Goods, cont. • In the case of most public goods it is simply not practical for a private business to provide the service, charge those who benefit, and exclude nonpayers from using the source. Maintaining street signs and traffic lights is one economic role of government. Chapter 3, Section 3
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Public Goods, cont. • Public goods can be used by any number of consumers without reducing the benefits to any single consumer.
• Public goods are financed by the public sector. – Firefighters are an example of a public good.
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Costs and Benefits • Checkpoint: What two criteria must be present for a public good? – The benefit to each individual is less than the cost that each individual would have to pay if it were provided privately. – The total benefits to society are greater than the total cost. Chapter 3, Section 3
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Costs and Benefits, cont. • The government pays for public goods through taxes. • Thus, the financial burden on each individual is significantly less than if a few people decided to fund a project privately.
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Free Riders • One issue associated with public goods is known as the “free-rider problem.” • Free riders are people who are not willing to pay for a particular good or service but would benefit from it if it were offered as a public good. – The free-rider problem suggests what would happen if the government stopped providing public goods: People would refuse to pay and many services would be eliminated. Chapter 3, Section 3
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Market Failures • Checkpoint: Why are public goods an example of a market failure? – Public goods are examples of a market failure, where the free market does not distribute resources efficiently. • For example, the free market would not be able to build roads efficiently because building roads does not meet the criteria for a properly functioning market system. Thus, road construction is a market failure. Chapter 3, Section 3
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Positive Externalities • Public goods involve externalities, which may be either positive or negative. • Positive Externalities – Represent the beneficial side effects of public goods. – Can also be generated by the private sector. – Allow someone who did not purchase a good to enjoy part of the benefits of that good. Chapter 3, Section 3
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Negative Externalities • Negative externalities cause part of the cost of producing a good or service to be paid for by someone other than the producer.
Why would increased car traffic be considered a positive externality by some people and a negative externality by others? Chapter 3, Section 3
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Government’s Goals • Understanding externalities helps us see more roles that the government plays in the U.S. economy. – The government may take action to create positive externalities, such as improving education. – The government aims to limit negative externalities like pollution.
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Government’s Goals, cont. • Many economists feel that the private sector produces more positive externalities that the government does. – This belief shows itself in the debate over how to stop pollution to the environment.
Chapter 3, Section 3
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Chapter 3: American Free Enterprise Section 4
Objectives 1. Explain the U.S. political debate on ways to fight poverty. 2. Identify the main programs through which the government redistributes income. 3. Describe how the government encourages private efforts to help the needy.
Chapter 3, Section 4
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Key Terms • poverty threshold: an income level below that which is needed to support families and households • welfare: government aid to the poor • cash transfers: direct payment of money by the government to the poor, disabled, or retired people • in-kind benefits: goods and services provided for free or greatly reduced prices • grant: a financial award given by a government agency to a private individual or group in order to carry out a specific task Chapter 3, Section 4
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Introduction • How does government help the poor? – To help the poor, government programs take money from some people and redistribute it to others. – Such programs include: • • • • • Chapter 3, Section 4
The welfare system Cash transfers In-kind benefits Medical and educational benefits Grant money Copyright © Pearson Education, Inc.
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The Poverty Problem • In a free market, the wealth is spread unevenly throughout society, which leaves some people below the poverty threshold. • The U.S. Bureau of the Census sets the poverty threshold based on the cost of the goods a family needs to buy.
Chapter 3, Section 4
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The Government’s Role • Checkpoint: What is the goal of the government welfare program? – The government provides a safety net to groups like the very young, the very old, the sick, the poor, and the disabled through various federal, state, and local government programs.
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The Government’s Role, cont. • One government program, the welfare program, collects funds from taxpayers and redistributes this money to those in need. – This system began during the Great Depression and continues today. Chapter 3, Section 4
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Welfare Reform • Critics of welfare claim that it discourages productivity and further aggravates poverty. – In 1996, new welfare reforms limited the amount of time people could receive welfare payments and gave states more freedom to experiment with antipoverty programs.
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Redistribution Programs • Government redistribution programs include the following: – Cash transfer programs • Temporary Assistance for Needy Families (TANF) - sends welfare payments directly to the states, which design and run their own welfare programs
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Redistribution Programs, cont. • Social Security - collects money from current workers and redistributes funds to retired and disabled persons
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Redistribution Programs, cont. • Unemployment Insurance – Provides money to workers who have lost their jobs as long as recipients offer proof that they have made efforts to get work. – This help is only temporary, offering benefits for only 26 weeks in most states.
• Worker’s Compensation – Provides state funds to workers injured on the job.
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In-Kind Benefits • The government also provides poor people with in-kind benefits, such as: – Food stamps • Qualified people receive assistance with their monthly food purchases
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In-Kind Benefits, cont. • Subsidized housing – Qualified people are allowed to rent housing for less than the regular rent
• Legal aid – Qualified people receive legal advice at no charge
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Medical and Educational Benefits • The government provides health care to the elderly (Medicare), the disabled, the poor (Medicaid), and children who are uninsured (SCHIP). • The government also funds educational programs from preschool to college. Chapter 3, Section 4
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Encouraging Private Action • Checkpoint: How does tax law provide an incentive to help the needy? – Federal tax laws allow both individuals and corporations to take tax deductions for charitable donations. – The government may also provide grants and other assistance to organizations that provide social services.
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