CHAPTER 3 AMERICAN FREE ENTERPRISE SYSTEM

LESSON 1

 Characteristics of Free Enterprise Capitalism

Free enterprise: an economic system in which privately owned businesses have

the freedom to operate for a profit with limited government intervention

Free markets: products can be bought and sold in markets without govt

regulation or interference
People often use the terms free enterprise, free market, and capitalism

interchangeable to describe our economic system

5 CHARACTERISTICS OF FREE ENTERPRISE

1. Economic Freedom: workers are free to choose occupation,

employer, job location, leave job, business can hire workers of their
choice, produce what they think will be profitable, as many items as they
want, sell them wherever they please, as price they choose
2. Voluntary Exchange: buyers and sellers free to exchange

goods/services for money or exchange would not occur

3. Private Property: people own and control their possessions as they

wish, use as they wish (if it doesnt interfere with rights of others)
Private property gives incentive to work, save and invest. Protected in US

Constitution in 14th Amendment Due Process Clause

 4. Profit Motive: free to risk our wealth in a business venture. Profit is what is

left after expenses are subtracted form sales. Profit motive is incentive to improve
ones material well-being responsible for economic growth in an economy.
5. Competition: struggle among sellers to attract consumers with best products

at lowest prices. Possible b/c businesses are free to produce what they think will
be profitable.
Consumers benefit b/c businesses are always trying to produce newer, better,

less expensive products

Helps the economy be ensuring most efficient producers will survive
So with scarce resources, competition helps to assure that these resources

are used as efficiently as possible.

BENEFITS OF FREE ENTERPRISE CAPITALISM

1. Individual freedom: choices we make about our occupation,

employer and job location would not be possible without free enterprise
capitalism
2. Variety of Goods
3. Adapting to Change: market economies adjust daily to forces of

change. Change mainly through price system.

Example: better gas mileage in cars has resulted through more efficient engines,

lighter-weight materials, etc. Also alternative energy sources come from wind
farms, solar energy, biofuels (made from renewable plant and animal material,
vegetable oils, industrial waste).

 4. Promoting progress: cell phone industry available from different

companies, in sizes, colors and with a variety of features that change

almost daily
5. Creation of Wealth: accumulation of products that are tangible,

scarce, have utility, are transferable from one person to another. Wealth
is created when more and better products are produced.
GDP: dollar value of all final goods, services, and structures produced within a

nation in one year US has largest in the world

An economic system based on free market capitalism is the most efficient wealth generating

system the world has ever seen.

DISADVANTAGES OF FREE ENTERPRISE CAPITALISM

1. Uneven Economic Growth: periods of faster or slower

growth (Great Recession of 2007-2009)

2. Growing Gaps Between Rich and Poor: rich often get

richer and poor remain poor. Solutions have been to divert

income from wealthy to poor through taxes and social welfare
programs socialist in nature. But voters can demand govt take
action if gap gets too wide.

 3. Large Supply-side Tendencies: many people demand many

products. But many suppliers tend to end up combining with other

suppliers to reduce competition, become more efficient in reality
reduced supply makes competitive markets less efficient and govt may
regulate if too few firms exist (GA Power)
4. Rights and Responsibilities of Business: same rights as individuals

(sue, contracts, own property). Responsibilities include treat employees

equally, protect consumers from harmful products. Other economies do
not include these we have them b/c voters force elected officials to
enact regulations when needed. So our free enterprise is slightly less
than free.