The Three Economic Questions Chapter 2, Section 1

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1 The Three Economic Questions Chapter 2, Section 1 All nations in the world must decide how to answer three economic questions about the production and distribution of goods. How a society answers these three economic questions defines its economic system. Every society must answer the following questions: What goods will be produced? Because of scarcity, no country can produce every good it wants in the quantity it would like. How will the goods be produced? Will production decisions be made by individuals or by the government? Will producers use existing technology or new technology? For whom will the goods be produced? Will the government decide? Will price decide? Will goods be produced for the purpose of trade with other countries? Major Differences between Free Enterprise and Socialism Use pages in your textbook to complete the chart highlighting the characteristics of each economic system. When you are finished, answer the questions at the top of the next page. Free Enterprise Socialism Resources Government s Role in the Economy Economics Plans Income Distribution Controlling Prices Private Property

2 The United States is considered to have a free enterprise (capitalist) economy but why should it really be considered a mixed economy? Why are almost all countries Mixed Economies? The Index of Economic Freedom that is in your textbook is a bit outdated. Go online and look up the 2015 Index of Economic Freedom. Choose one country in each of the categories and then describe why that country earned the score that it did. Country Economic Characteristics (why did this country earn the score it received) Free Mostly Free Moderately Free Mostly Unfree Repressed

3 The Visions behind Free Enterprise and Socialism Use pages in your textbook to complete the chart. You can use the chart on page 39 to make sure you hit the key points. Adam Smith Karl Marx Place and year of birth Major Work (book) Economic system based on his ideas Ideas contributing to his visions Use the following key to label each of the statements as more like the free enterprise vision of Adam Smith or more like the socialist vision of Karl Marx. S = Adam Smith, free enterprise vision M = Karl Marx, socialist vision Resources are owned by private individuals Government decision makers write economic plans Private property is sacred. Government makes major decisions concerning the use of resources and the production of goods. Much attention is given to distribute income away from high earners toward low earners. Government owns and controls many resources. Government does not attempt to control prices. Government plays a small role in the economy. Government sets wages and the prices of goods. Government owns most property and uses it for the benefit of the people.

Free Enterprise Class Notes Economics Chapter 3 Section 1: Characteristics of Free Enterprise I. How Does Free Enterprise Answer the Three Economic Questions? A. will produce the goods that consumers want to buy.

4 Free Enterprise Class Notes Economics Chapter 3 Section 1: Characteristics of Free Enterprise I. How Does Free Enterprise Answer the Three Economic Questions? A. 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 car-buying public wants to buy. B. The individuals who _ and the business firms decide how goods will be produced. C. Goods are produced for those people who are _ and 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. II. Five Features of Free Enterprise A. PRIVATE PROPERTY Private property can be described as any good that is owned by an 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 property. Sometimes the government may have a need for private property. Under the right of, the government can take ownership of private property even without the consent of the owner. In such cases, the government will owners for their loss. Eminent domain has been used to obtain private land for such uses as building new schools, highways, and government buildings. B. CHOICE (or Freedom to Choose) _ have the right to choose what work they want to do and whom they will work for. have the right to choose the products they will produce and offer for sale. Likewise, have the right to choose the products they will buy. C. VOLUNTARY EXCHANGE In free enterprise, individuals have the right to make exchanges or that they believe will make them. Trading $10 cash for a book is an example of a voluntary exchange. D. COMPETITION Consumers are likely to benefit from competition between. Workers can also benefit from competition. The competition between employers for labor services will often result in wages. E. ECONOMIC INCENTIVES Under free enterprise, 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.

5 III. IV. Laws, Institutions, and Regulations A. A country s _ system determines, to a large degree, how free enterprise operates. B. Legal systems and institutions can either help or hinder free enterprise. The Circular Flow A. The circular flow of economic activity in the U.S. economy shows the among the key players in the economy. B. sell resources to businesses, and businesses pay for these resources. C. sell goods and services to households, and households pay for these goods and services. D. Households pay taxes to, and provides goods and services to households, such as roads, schools and national defense. E. Businesses pay _ to government, and government provides and to businesses. The circular diagram is useful because it helps us see how a _ in one economic activity (such as paying taxes) will lead to a change else in the economy (such as the amount households spend on goods and services produced by businesses).

Chapter 3, Section 1 Applying the Principals 1 1. What economic activities flow from businesses to households? 2. What economic activities flow from households to businesses? 2 3 3.

6 Chapter 3, Section 1 Applying the Principals 1 1. What economic activities flow from businesses to households? 2. What economic activities flow from households to businesses? What economic activities flow from government to households? 4. What economic activities flow from households to government? 4 5. What economic activities flow from government to businesses? 6. What economic activities flow from businesses to government? In questions 7 16, identify the part of the circular flow diagram in which the economic activity listed occurs. Write 1, 2, 3 or 4 in the blanks provided. 7. Mycah attends a public school. 8. Travis buys a new car. 9. Mikayla works 20 hours a week at Burger Barn. 10. Trish does research at a large corporation. 11. Microsoft relies on the Justice Department to enforce copyright laws. 12. Dianne drives on County Road 1 to get to work. 13. Bruce leases his commercial building to Widgets, Inc. 14. Dawn buys a computer from her local office supply store. 15. Vanh buys a lawn mower from Home Depot. The following questions relate to the circular flow diagram. 16. If a recession causes households to reduce spending, how might businesses be affected? 17. If government raises taxes on businesses how might households be affected? 18. If government cuts taxes on households, how might businesses be affected?

7 Section 2: Profit and Loss in Free Enterprise I. Profits and Losses A. Profit equals total _ (price of a good times the units of the good sold) minus total (average cost of a good times the number of units of the good sold). B. Profit is the amount of money left over after all the costs of production have been paid. Profit exists whenever total is greater than total _. C. A occurs when total cost is greater than total revenue. TOTAL REVENUE = TOTAL COST = PROFIT = LOSS = For example, suppose you sell 10 sets of headphones at $100 each, for a total revenue of $. If it costs you an average of $70 each to produce those head phones, your total cost to produce 10 head phones is $. Do you have a profit or a loss on your sale of 10 head phones? Answer: of $ II. Profit and Loss as Signals A. In a free enterprise economy, some businesses are earning profits and some are taking losses. Profits and losses are to the firms actually earning the profits or taking the losses, and signals to firms standing on the B. A firm on the sidelines will see what product is profitable and possibly that market. C. A firm may _ a product that is producing losses, and its resources to a profitable product. D. Resources flow profit and from losses. Chapter 3, Section 2 Applying the Principals Scenario: Bryan sells gadgets at a price of $7 apiece. His average cost is $5 per gadget. On Monday, Bryan sold 10 gadgets; on Tuesday, he sold 7 gadgets; on Wednesday, he sold 9 gadgets; on Thursday, he sold 11 gadgets; and on Friday, he sold 13 gadgets. 19. What was Bryan s told revenue for the week? 20. What was Bryan s told cost for the week? 21. Did Bryan have a profit or a loss for the week? 22. What was the dollar amount of Bryan s profit or loss for the week?

8 Section 3: The Ethics of Free Enterprise I. Ethics and Free Enterprise A. Ethics consists of the principles of CONDUCT, such as right and wrong, morality and immorality, and good and bad. B. An ethical economic system should have four characteristics. Supporters of free enterprise say that the free enterprise economic system has these characteristics. 1. Allow individuals to their own occupations or professions. 2. Produce the goods and services preferred by both the majority and the. 3. (or ) producers according to how well (or poorly) they respond to the preferences of the buying public. 4. Provide people with numerous, 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. II. III. Economic Principles in Key Documents A. The Bill of Rights shows a high regard for property. The Bill of Rights notes that private property [shall not] be taken for public use, without just. B. The Declaration of Independence encourages free - an essential ingredient of free enterprise. The Declaration of Independence lists _ against the king of Great Britain, George III. One complaint is that the king prevented the 13 colonies from with all parts of the world. C. The Constitution preserves 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 from any State. To preserve competition, it was important to allow the free trade of goods state lines. Economic Rights and Responsibilities in a Free Enterprise Economy A. People in a free enterprise economy usually share three sets of rights and responsibilities: 1. The right to sell an item comes with the responsibility to disclose any relevant facts about the item in question. 2. One has the right to use private property as one wishes, within the limits of the law. 3. The responsibility attached to the right to compete is that one must compete in a truthful, legitimate manner.

9 Section 4: Entrepreneurs I. Imagine Being an Entrepreneur A. An entrepreneur is a person who has a special talent for out and taking of new business opportunities. B. Entrepreneurs play an important role in society by taking to develop new products or new ways of doing things that the public. Most people are not entrepreneurs; entrepreneurs are a tiny _ of the population. II. Entrepreneurs, Profit and Risk A. People will not risk their time and money to develop new products unless they can potentially earn a. B. Not all entrepreneurs are _. C. However, a few end up as millionaires and even billionaires, and it is the prospect of such that entrepreneurs. Critical Thinking Questions 33. Bill Gates, Steven Jobs and Ted Turner are entrepreneurs whose work has made them among the wealthiest people in the world. Why is it necessary to allow entrepreneurs to benefit from their work? 34. How do we all benefit from the work of entrepreneurs? Section 5 I. Government as of Contracts A. A contract is an agreement between two or more people to do something. Government people who break their contracts. In other words, the government enforces contracts. Without government to enforce contracts, the of going into business would be too great for many people. B. Could the free enterprise system function without a government to enforce contracts? Probably not as well, because the risks of going into business would be too. II. Government as Provider of Nonexcludable Goods A. Goods are categorized as two major types: private goods and public goods. A _ good is a good in which one person s consumption takes away from another person s consumption. Examples include food and gas. A _ good is a good in which one person s consumption does not take away from another person s consumption. An example would be a movie in a movie theater.

10 A public good can be excludable or non-excludable. 1. An excludable public good is a public good that individuals can be excluded (physically prohibited) from _. An example would be a college lecture, which is available only to enrolled students of the college. 2. A non-excludable public good is a public good that individuals cannot be _ from consuming. An example would be national defense. are people who receive the benefits of a good without paying for it. B. Who will want to produce a nonexcludable public good? Economists say that in a free enterprise system, will want to. After all, people will not pay for something they get anyway. However, even in a free enterprise economy, people want non-excludable public goods, such as national defense or flood protection (dams). Who will produce these goods? The will provide non-excludable public goods and pay for them with. C. One way for people to communicate what nonexcludable public goods they want is through the _ process. III. Externalities A. There are two kinds of externalities: negative and positive externalities. A negative externality is an side effect of an act that is felt by others. A positive externality is a side effect of an action that is felt by others. B. Some people argue that _ generates positive externalities. What you learn at school will not only help you earn a living, but also help you become a better citizen and a more informed voter. Following that argument, if the public from your education and the education of others, then the should pay for that education. Some people argue that should pay for all activities that generate positive externalities for society. C. When it comes to negative externalities, some might say that the role of government is to the negative externalities. Government can reduce the negative externalities through the following: the _,, and. 1. If you have a against a negative externality, the courts are available to hear your case and find a resolution. 2. The government _ regulations, such as speed limits and pollution standards, to deal with negative externalities.

11 Chapter 3, Section 5 Applying the Principals Use the following key to label each of the goods in questions 8-15 as a private good (P), an excludable public good (E), or a nonexcludable public good (N). 35. fireworks display 36. public radio 37. cell phone 38. dam 39. toll road 40. national defense 41. rock concert 42. hamburger Use the following key to label each of the situations described as a positive externality (P) or a negative externality (N). 43. Your neighbor has loud parties late into the night, keeping you awake. 44. Your neighbor has a large oak tree that shades your yard. 45. Your neighbor does not take care of his house; the house is literally falling apart. 46. Your community has excellent schools. 47. The person sitting next to you in a restaurant is talking loudly on a cell phone. 48. A factory in your town spews pollution into the air. 49. Your state requires children to get vaccinated for common diseases. 50. People in your community shoplift at local stores.

Profit and Loss in Free Enterprise

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