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Chapter 3

Chapter 3 . The American Free Enterprise System. Sec 1: Advantages. What is it? Another name for capitalism System based on private ownership Anyone is free to start a business. How does it work? Open opportunity: enter & compete in market of choice Legal equality: same rights

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Chapter 3

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  1. Chapter 3 The American Free Enterprise System

  2. Sec 1: Advantages • What is it? • Another name for capitalism • System based on private ownership • Anyone is free to start a business • How does it work? • Open opportunity: enter & compete in market of choice • Legal equality: same rights • Free contract: decide which legal agreements to enter • Profit motive: incentive

  3. Sec 2: How does free Enterprise allocate resources • Profit • Money left over after subtracting costs (revenue – costs) • Allocate resources – seeking opportunities • Modified free enterprise system • Has government involvement • Government is a consumer of both resources & products

  4. Sec 3: Government and free enterprise • Providing public goods • Everyone benefits (street lights, defense) • Called market failures • Someone has to pay for it (free rider; person who benefits from public goods, but did not pay for them) ex: fireworks display • Infrastructure – goods/services necessary for society to function

  5. Sec 3 continue • Externalities • Side effect of a product, effects on others not producer/buyer (give me an example) • Negative externalities; imposing a cost on those people not involved • Positive externalities; creates benefits for others not involved

  6. Public transfer payments • Government as a safety net • Protecting people from economic hardship • Transfer payments -redistribution of wealth • Public transfer payments – tax money to individuals that do not provide anything in return • Social security, medicaid, mediare, foodstamps, unemployment, etc • What are the opportunity costs of public transfer payments?

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