FREE ENTERPRISE. Chapter 3

Transcription

1 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.

2 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.

3 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.

4 Free Enterprise In a free enterprise system, individuals own most, if not all, of the resources.

5 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.

6 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.

7 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.

8 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.

9 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.

10 The Circular Flow of Economic Activity

11 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).

12 Profits and Losses CHAPTER 3: SECTION 2 Profit and Loss in Free Enterprise 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.

13 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

14 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

15 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.

16 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.

17 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.

18 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.